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Context: Retirement fund body Employees’ Provident Fund Organisation has recommended that the government pay an 8.5% interest to subscribers for 2019-20 as announced earlier, but in two instalments instead of the usual one as market volatility has affected its income from equity investment.

More about news:

  • Earlier, the Employees’ Provident Fund Organisation (EPFO) had lowered the interest rate on provident fund savings for 2019-20 to a seven-year low of 8.5 per cent, down from 8.65 per cent the previous year.
  • Now  the retirement fund body is in a position to make only part payment of interest.
  • The central board of trustees of the EPFO recommended paying the 8.5 per cent interest in a staggered manner due to “exceptional circumstances arising out of COVID-19”.
  • The EPFO has recommended that 8.15% interest, from its income from debt investment, be credited immediately into the accounts of its 50 million subscribers. 
    • The balance 0.35% will be paid in December, from the sale of investment in exchange-traded equity funds.
  • The proposal will now be sent to the Finance Ministry for ratification. 

Employee’s Provident Fund (EPF) 

  • It is a retirement benefit scheme, available for all salaried employees. 
  • It is looked after and maintained by the Employees Provident Fund Organisation of India (EPFO). 


  • As per law, any registered company which has more than 20 employees has to get registered with the EPFO.
  • All salaried employees are eligible for the Employee’s Provident Fund (EPF). 
  • However, for a salaried employee earning less than Rs 15,000 per month, it is mandatory for them to register for an EPF account. 

EPF Contribution by Employees and Employers

  • Under the EPF scheme, both the employee and the employer make an equal contribution towards the scheme. 
  • Once the employee retires, he/she gets a lump sum amount – which includes the contribution made by self and the employer – with interest. 
  • The contribution made by both the employer and the employee is 12 percent of the employee’s basic salary. 
  • Though the entire 12 percent of the contribution made by the employee goes into their EPF account, 8.33 percent out of 12 per cent from the employer’s contribution is diverted to the employee’s EPS (Employee’s Pension Scheme) account. 
  • The balance of 3.67 percent from the employer’s side goes into the employee’s EPF account.

Calculating interest rate

  • The EPFO’s Central Board of Trustees after consultation with the Ministry of Finance reviews the interest rate of EPF every year, for a financial year.
  • Unified Mobile Application for New-age Governance (Umang) app is a one-stop solution for many government services, including Employees Provident Fund (EPF).
  • As per convention, after the Central Board of Trustees recommends the interest rate, it has to be ratified by the Finance Ministry.
    • Then it gets credited into the accounts of the fund’s subscribers.
  • Conditions for fund withdrawal:
    • Normally, one is not allowed to withdraw amounts from one’s EPF account. 
    • However, exceptions are made if the employee wants to be self-employed or is no longer working. 
    • Other exceptions include education, marriage or medical expenses of the immediate family, and repaying housing loans. 

Central board of trustees of the EPFO 

  • It is a statutory body constituted by the Central Government under the provisions of section 5A of the Employees' Provident Funds and Miscellaneous Provisions Act,1952
  • The tenure of the Board is five years
  • The constitution of the Board as per section 5A of the Act is as under:
    • Chairman 
    • Vice Chairman 
    • Central Provident Fund Commissioner 
    • 5 Central Government Representatives 
    • 15 State Government Representatives 
    • 10 Employers Representatives 
    • 10 Employees Representatives


  • Falling ETF returns: The EPFO invests 85% of its annual accruals in the debt market and 15% in equities through ETFs. 
    • While preparing the income projection in March for the given financial year, EPFO had factored in an income between ₹2,700 crore and ₹3,500 crore from dividends and sale of ETFs.
    • The retirement fund body’s income declined due to bad markets.
    • The EPFO has been questioned over its exposure to risky entities such as the IL&FS.
  • Unsustainable interest rates: With the Reserve Bank of India cutting the benchmark repo rate sharply over the past few months, there has been a sharp reduction in both short- and long-term rates in the broader economy. 
    • In fact, the 10-year G-sec yield now stands at 6.05 per cent. Small savings rates range from 4.0-7.6%.
    • Therefore proposing a higher interest rate that is not in sync with the conditions in the broader economy will be unsustainable.
    • The Finance Ministry has been pushing the EPFO to reduce the rate to sub-8% level in line with the overall interest rate scenario.

The EPFO and its subscribers must be mindful that promises of returns higher than yields on government securities will be met through riskier investments such as corporate debt and equities. The organisation thus must seek to minimise the risk for its subscribers, and align itself more closely with the overall interest rate scenario in the economy.

Exchange Traded Funds (ETFs)

  • These are mutual funds listed and traded on stock exchanges like shares. 
  • Index ETFs are created by institutional investors swapping shares in an index basket, for units in the fund. 
  • In an ETF, one can buy and sell units at prevailing market price on a real time basis during market hours.


  • The Bharat 22 ETF to be offered now allows the Government to park its holdings in selected PSUs in an ETF and raise disinvestment money from investors at one go. 
  • It tracks the specially made S&P BSE Bharat 22 Index, managed by Asia Index Private Limited. 
  • This index is made up of 22 PSU stocks and with a few private sector companies.


  • ETFs are cost efficient. Given that they don’t make any stock (or security choices), they don’t use services of star fund managers. 
  • ETFs allow investors to avoid the risk of poor security selection by the fund manager, while offering a diversified investment portfolio. 
  • The stocks in the indices are carefully selected by index providers and are rebalanced periodically. 
  • ETFs offer anytime liquidity through the exchanges.

Source: Indian Express

Image source: Firstpost.com

After reading this article, answer the following question for Mains answer writing practice. Also you can get your answer checked free of cost by clicking on the following link.

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Q) The Retirement fund body Employees’ Provident Fund Organisation has outlived its utility; it must be downsized. Comment. (150 words)