EPFO defers one part of 8.5% interest payment due to COVID-19. Here’s what experts have to say about it

• EPFO on Wednesday decided to provide an 8.5% rate of interest on employees' provident fund (EPF) for 2019-20 as committed earlier but in two tranches.
• Business Insider spoke to experts to understand the impact of this move.
• Check the latest news and updates on Business Insider.

Retirement fund body EPFO on Wednesday decided to provide an 8.5% rate of interest on employees' provident fund (EPF) for 2019-20 as committed earlier but in two installments. According to a PTI source, the EPFO will provide an 8.15% interest on EPF soon, and the remaining 0.35% rate would be credited into the subscribers' account by December 31, after the proposed liquidation of ETFs.

"In view of exceptional circumstances arising out of COVID-19, the agenda regarding interest rate was reviewed by the Central Board and it recommended the same rate of 8.50% to the Central Government,” the EPFO statement read.

Business Insider spoke to experts to understand the implications of the proposal.

"In my opinion, there is no need to panic; the interest rate tranches of 8.15% and 0.35% is yet to be approved by the finance ministry and more so since the government has already declared the source of balance interest payment, which is 0.35%, from exchange-traded funds," Manjula Muthukrishnan, Managing Director - India, Avalara Technologies Pvt. Ltd. said.

She further added, "We trust that the authorities have thought through the unique situation with back up plans. Subscribers should also note that the credit of interest in multiple instalments affects only to those subscribers who would be withdrawing the amounts soon and not applicable to all."

Chetan Yadav, Chief People Officer, Tally Solutions, believes that since EPFO is a longer-term account, the proposal might not affect the cash in hand.

“It is fine even if it is paid in instalments. Had COVID-19 not happened, EPFO would have come out with a lower interest rate. The fact that they’re accommodating with the situation is positive news,” Yadav told Business Insider.

However, Diva Sharma thinks otherwise. According to him, the proposal is only going to make EPFO investors anxious.

“EPFO investors and trade unions were already unhappy with the earlier decision to reduce the interest rate from 8.65% in 2018-19 to 8.50% in 2019-20. This news brings in further apprehension in the mind of EPFO investors on its ability to ensure investment returns on the corpus for paying 8.5% interest in the coming years as the yield from debt instruments are falling and equity markets are highly volatile,” says Divam Sharma, Co-founder, Green Portfolio.

Sharma said EPFO doesn’t have the cash to pay its subscribers as their ETF investments (usually 85% in Debt instruments and 15% in Equity instruments) have shown negative returns in the last five years. EPFO was also forced to sell some of their Equity ETFs to raise cash for paying the balance 0.35% interest (from the proposed 8.5% for 2019-20).

Apart from the shortage of cash, EPFO is yet to clarify a range of issues.

“Questions that still remain unanswered are (a) Employees who withdrew their EPF on account of losing their jobs in the exceptional situation of the Covid-19 Pandemic, would they still be eligible for this interest? (b) If an employee has withdrawn his EPF partially, what would be the base on which interest will be calculated for FY 19-20? Also going forward for the next FY 20-21 what would be the base on which interest would be calculated?” Smita Goel, Partner, Taxation, Algo Legal said.

On the other hand if EPFO decides to pay the interest in one go, as media reports suggest, EPFO will face an income shortfall of roughly ₹2,500 crore, according to Manjula Muthukrishnan, Managing Director - India, Avalara Technologies Pvt. Ltd.

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