InvestorQ : Is it true that the EPFO has cut the interest rates on provident fund deposits this year?
Mitali Bhutta made post

Is it true that the EPFO has cut the interest rates on provident fund deposits this year?

Answer
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2 months ago
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That is absolutely correct. In fact, on Friday, the board of EPFO (Employee Provident Fund Organization) cut the interest rates on PF from 8.5% to 8.1% for FY21-22. This is lowest since 1977. Since then, the rates on EPF has been consistently falling. Even at the peak of the COVID pandemic, the government only marginally cut the amount of interest paid on the PF deposits. Government does not want to disrupt with many depending on PF for retirement.

EPFO rates are still too high. Here is why. When bank FDs pay 5.5% coupon rate, the EPFO was paying 8.5%. It has largely been a politically sensitive subject so even now it is possible that the EPFO board has suggested the rate cut but central government may strike it down. One reason, this rate cut is justified is that if you look at the yields on many of these small savings products, they are huge if you consider the tax benefits.

In the case of EPF, not only is interest tax free but even Section 80C benefit is available for investment. If you are in the 20% tax bracket, your effective yield on CPF at 8.1% interest works out to 12.5%. But, if you are in the 30% tax bracket, your effective yield is above 16%. That is high for an assured return product with zero default risk. You just cannot earn that kind of yields on a total risk free type of investment. That is why it must change.

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