Experts give thumbs up to new EPF rate of 8.15%. Here’s why

In major good news for salaried individuals, the Central Board Trustees (CBT) of the Employees' Provident Fund Organisation (EPFO) has recommended a 0.05% hike in employees' provident fund account (EPF) to 8.15% for the fiscal year FY23. Although the EPF rate at 8.15% is still at a four-decade low, however, the new rate is likely to drive the formal sector. Also, the latest hike makes EPF a stable investment option for risk-averse individuals.

The 8.15% interest rate will be credited to EPF accumulations in members’ accounts for the financial year 2022-23. This new rate after receiving Finance Ministry's approval will be implemented officially accordingly. 

EPFO would credit the rate of interest into its subscribers’ accounts. 

As per the data released by NSO, 6,27,08,006 new subscribers joined the EPF Scheme from September 2017 to January 2023.

In January this year, EPFO added 14.86 lakh net members to the provident fund account. Of the total, around 7.77 lakh new members have come under the ambit of EPFO for the first time. While only 3.54 lakh members exited the fold of EPFO this month --- which is the lowest exit in the last four months.

Even though EPF accounts witnessed a fractional hike, the latest interest rate couldn't have come at a better time when debt mutual funds are undergoing new tax rules in line with Finance Bill 2023.

Aditya Damani, Founder, and CEO, of Credit Fair, said, "The marginal increase in the EPFO interest rate is driven by rising interest rates, volatility, and inflation. At a time when withdrawal of indexation benefit from the debt mutual funds has been proposed in the Finance Bill 2023, the EPF interest rate, in a way, offers a stable investment option for risk-averse individuals."

Recently, in Finance Bill 2023, the Centre proposed to tax investments in debt mutual funds as short-term capital gains. This could strike off long-term tax benefits that made debt MF investments popular.

Notably, mutual funds with less than 35% invested in domestic equities are proposed to be treated as short-term and the indexation benefits that help significantly reduce tax liability available to such funds may be removed prospectively.

Furthermore, it is believed that the new rate will motivate more individuals to participate in the EPF scheme, and thereby contribute to the formal sector's growth ahead.

As per Lohit Bhatia, President- Workforce Management, Quess Corp, the recent announcement on the hike in EPFO interest rates from 8.10% to 8.15% for the financial year 2022-2023 is a positive indicator of the state of the Indian economy. This assures increased income, especially for members who solely rely on EPFO as a source of retirement income. In January 2023, EPFO added over 14 lakh new subscribers to payroll with notably the lowest exit numbers, indicating a surge in job creation. This is reflective of the sentiment shift of workers in India to move from the informal to the formal economy, which holds great potential for the country’s economic growth.

Bhatia added, "Our joint report with FICCI titled ‘Karnataka Jobs Report 2022-23’ reveals that as of January 2023, 6.83 crore members have been making monthly contributions to the EPFO, indicating the number of people who are currently on payroll and in the formal sector. With the recent hike in EPFO interest rates, it is expected that more individuals will be motivated to participate in the scheme, thereby contributing to the growth of the formal sector.”

According to Labour Ministry on Tuesday, EPFO over the years has been able to distribute higher income to its members, through various economic cycles with minimal credit risk. Considering the credit profile of the EPFO investment, the interest rate of EPFO is higher than other comparable investments avenues available for subscribers. 

EPFO has consistently followed a prudent and balanced approach towards investment, putting highest emphasis on the safety and preservation of principal with an approach of caution and growth.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.