Author Rajath
3rd year,
 School of Law, CHRIST.


Provident fund has been one of the few sources of income for employees after their retirement. The savings scheme brought forward by the Government of India has been in existence since 1952 and is a panacea for employees to rely upon the fund to have better livelihood. The scheme involves contribution from both the Employees as well as the Employers for the Fund, which can be claimed either through the course of employment (after the limitation period) or after retirement. This Social Security measure has been recognised to be an ideal mechanism to deal with post-retirement corpus issues and reduces burden of employee from other financial institutions like mutual fund investments. Provident Fund organisations work on the interest set by the Central Government and recently added higher burden to the employees due to the fluctuation of interest rates for every financial year. This research paper shall attempt to identify the Reason for the change in Interest Rate every financial year, Issues related to the fluctuation of Interest Rates and primarily the impact of the fluctuation on the Employees and their savings. The paper shall also attempt to identify the utility of all the corpus which has already accumulated in the Government coffers and the methods adopted by the Central Government to invest the funds in other areas of the Government, and also a brief view on the Government’s plan to privatise the Employees Provident Fund Organisation.
The Employees Provident Fund and Miscellaneous Provisions Act was brought into force in the year 1952, in light of the development that took place, primarily with respect to the Retirement Savings Scheme for the Employees.  The EPF is administered by a Central Board of Trustees, which consist of representatives, primarily from the Government of India, the Employees sector and the Employers Division[1]. The Employees Provident Fund Organisation, which ensures and enables the Employees to receive their Provident Fund dues come under the ambit of the Ministry of Labour and Employment.

In the Employees Provident Fund. Equal contribution amounting to 12% of each employee’s salary is made by the Employers as well as the Employees[2]. The total accumulated amount along with the amount of interest received at the time of deposition is entirely tax exempted. There are several factors that make the Provident Fund Scheme a unique initiative by the Government, including the opportunity to voluntarily contribute more than 12%, partial withdrawal before the retirement for the purpose of Education of Self, Children, Spouse, or marriage or maybe for the purposes of Marriage.

Every Employee is provided with a UAN after he becomes an EPF Account Holder. After 2008, the UAN has remained the same even after the Employee has shifted or changed places of Employment. The EPF Account holders can view the details of all the accounts held by them with different establishments[3].          

PF Interest Rates

The P.F Interest Rate for the Year 2019-2020 is 8.33%. The Interest is applicable to the accumulated fund in the P.F Account is completely Tax exempted.  The interest received is directly transferred to the account of the Employers Provident Fund and is computed as per the rate pre-decided and made by the Central Government in consultation with the Central Board of Trustees
. The interest rate announced by the Government in a particular year remains valid until the concurring financial year.  In case no contribution is made in the EPF Account for more than 36 months, then the account becomes inoperative or dormant. The Interest rates have been growing ever since the first interest rates were imposed on the EPF, in the year 1952.  These rates have consistently grown from 3% in 1952, extending to 8.5% in the Financial Year 1981-82 and consistently grew upwards touching an all-time high mark of 12 % in the financial year 1999-2000. The current interest rate for the Financial Year of 2019-2020 is 8.33% as announced by the Finance Ministry of the Government of India. The Central Government is the appropriate government in the matter to determine the said interest rate as the Employees Provident Fund, extends to the entire country and there is uniform interest rate set every year[4].

P F Contribution Calculation

Based on the entity that contributes towards the Employees Provident Fund Account, it is segregated into two parts- Employees Contribution & Employers Contribution. The total extending up to 12% has to be contributed by both of them, which should comprise of both the Basic Salary and Dearness Allowance. The Provident Fund Interest is computed per month, but the deposition shall be made only at the end of the financial year.  

Changes in the Interest Rates and its impact

The changes in the Interest Rates have had a considerable impact on the general public. The Government is currently slated to reduce the Interest of Contribution from the existing 12% to 10%. The said changes shall have both positive and negative outcomes. The positive outcome is primarily that the basic salary of an employee shall increase by 2% and if the said amount is judiciously utilised, then the returns from the stipulated amount can amount to several lakhs at the age of retirement. Another major factor, shall be the tax exemption that the Employee shall have to bear, shall be minimised[5].   The consequence of the same, in a negative way, shall be the reduction in the stipulated corpus that the Provident Fund holder shall be taking at the end of employment or at the age of superannuation. The reduction is a rather heavy percentage and amount when it is calculated, will have a significant impact on the savings. The fluctuation in the percentage should indeed be recognised as a factor affecting the employees. Economy, no doubt plays an integral role in determining the direction of growth of the country, nevertheless, Social Security System, as the term defines is a mechanism that motivates employees to be self-reliant at the time as well as post-retirement[6].  The Policy makers shall fail, if they choose to overlook the reasons of the fluctuation. The impact shall not merely be on the general public, but even on the Government, as the public shall start losing the faith imposed on the representatives, leading to a state of Anarchy[7].

General Corpus and its Utility

The Provident Fund that is collected at the Employees Fund Organisation is available either during the tenure as already explained earlier, or at the time of retirement/superannuation. The Government has utilised a method to make revenue from the existing funds. The said funds are kept as reserve and interest is accrued in the form of loans being lent by the Government to several other entities[8]. The Government is also looking forward to invest the accumulated amount in the Mutual Funds. The corpus tuning to several thousand crores also includes the funds which have not been claimed, on occasion to the death of the employee, or even due the winding up of the employer’s company[9]. The reason why the said funds, do not reach the destined employee is majorly due to the ignorance of the Legal Representatives of the Employee, or even due to lack of knowledge including the procedure. Thus, the revenue generated out of the corpus, is not in any way beneficial to the Provident fund holder, but is merely adding up to the coffers of the Government[10].

Privatisation of Provident Fund- A Boon or a Bane

During the 1970’s, several private entities were offering Provident Fund Schemes. If the Provident Fund Structure itself is privatised, it has both positive as well as negative effects, which may give sleepless nights to both the PF Account Holders as well as the Government.  Privatisation primarily shall result in the disinvestment of the EPFO, affecting in the Government, which results in stopping its contribution to the Fund[11].  One of the outcomes of the Privatisation shall be the interest rates being Employer friendly, thereby digressing the needs of the Employees. This move shall see stiff opposition from the Trade Unions, which for once, in an unprecedented manner are choosing to take the side of their employees. The proposed consolidated draft of the Social Security Bill seeks to bring all the Labour related laws under one structure. This shall in turn help in efficient administration as well as speedy disposal of justice, as these legislations are not merely codes of guidelines. But are also punitive in nature. Thus, the Employees Provident Fund, being privatised shall be an experiment by the Appropriate Government, to identify the outcomes on the Economy. There still exists the experimentation with high denominations of funds from the corpus as a major policy concern[12]. There can be no sure conclusion as the debate of it being a boon or bane shall continue to persist until the dream of Social Welfare is realised.

[1] Asher, M. (2001), The case for a regulatory authority for India’s pension system, Research report2-2001, International Centre for Pension Research< /span>

[2] Bhattacharya, B. K. (2003), ‘Report of the group to study the pension liabilities of the state governments’, Reserve Bank of India

[3] Mohan, R. (2004), ‘Report of the advisory committee to advise on the administered interest rates and rationalisation of savings instruments’, Reserve Bank of India.

[4] Alier, M. & Vittas, D. (1999), Personal pension plans and stock market volatility, in ‘New ideas about old age security’, World Bank

[5] Shah, A. & Thomas, S. (2003a), Equity derivatives in India: The state of the art, in S. Thomas, ed., ‘Derivatives markets in India 2003’, Tata McGraw–Hill, chapter 1, pp. 1–25.

[6] Srinivas, P. S. & Thomas, S. (2003), ‘Institutional mechanisms in pension fund management: Lessons from three Indian case studies’, Economic and Political Weekly XXXVIII (8), 706–719.

[7] Bhattacharya, B. K. (2003), ‘Report of the group to study the pension liabilities of the State Governments’, Reserve Bank of India.

[8] Shah, Ajay. (2005), ‘A sustainable and scalable approach in Indian pension reform’, Ministry of Finance

[9] Mohan, R. (2004), ‘Report of the advisory committee to advise on the administered interest rates and rationalisation of savings instruments’, Reserve Bank of India.

[10] Patel, U. R. (1997), ‘Aspects of pension fund reform: Lessons for India’, Economic and Political Weekly XXXII (38), 2395–2402.

[11] Walliser, J. (1999), Regulation of withdrawals in individual account systems, in ‘New ideas about old age security’, World Bank.

[12] Pennacchi, G. (1998), Government guarantees on pension fund returns, Technical report, World Bank

Leave a Comment