'Over 6 cr EPFO members to get 8.65% interest for FY19'

Employees' Provident Fund Organisation (EPFO) will pay higher interest on the deposit of over 6 crore of their subscribers for 2018-19.

The money will be credited into the bank account of subscribers well ahead of the festive season. Labour Minister Santosh Gangwar on Tuesday said that over 6 crore EPFO members will get 8.65% interest for 2018-19.

EPFO had earlier decided to hike the interest rate for the year gone by but was waiting to notify the same after concurrence from the finance ministry.

This is the first increase in the interest rate of EPF in the past two years. Currently, the EPFO is paying an interest rate of 8.55% for 2018-19 under EPF withdrawal claims. The 8.55% interest rate on EPF deposits was fixed for 2017-18.

According to the EPFO's estimates, it would have a surplus of Rs 151.67 crore after providing 8.65% rate of interest for 2018-19 on EPF.

The move is certain to cheer the salaried employees but may prove to be a hindrance in banks cutting lending rates despite the Reserve Bank of India reducing its key interest repo rate to signal the lenders should reduce lending rates too.

So far in 2019, the RBI has reduced repo rate by 110 basis points and has also asked lenders to link their loans to external benchmarks, one of them being the repo rate.

Employees generally contribute only 12% of their basic salary towards EPF. But no rule prohibits an employee to contribute more than 12% of his or her basic salary to the fund. The employee contribution can even be increased to 100% (basic+ dearness allowance).

In a scenario where the interest on EPF is more than that on banks', a salaried employee may be tempted to put all his or her basic pay and dearness allowance into EPF account to take advantage of the higher rate. According to analysts, high interest on EPF funds can lead to a flight of household deposits into those funds.

That would lead to banks' deposits taking a hit and prompting banks too to increase interest rates. Now, banks cannot increase interest rates on deposits if their lending rates are low. This makes credit outflow to individuals and businesses difficult by the lenders despite the RBI lowering interest rates.