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Friday, March 23, 2012

Finance Ministry ups GPF interest rate to 8.6%; move likely to boost EPF rate next year

For the first time since 2003, the finance ministry has hiked the interest rate on government employees' retirement savings parked in the General Provident Fund (GPF) from 8% to 8.6%.

A similar rate hike has also been effected in a special deposit scheme (SDS) where nongovernment retirement funds have invested over Rs1,10,000 crore. This could boost the Employees' Provident Fund (EPF) rate next year, which was slashed last week from 9.5% to 8.25% for 2011-12.

Around 1.5 crore government employees invest part of their salary into the General Provident Fund (GPF). The finance ministry notified the increased SDS interest rate on March 13 and the hike in the GPF rate on March 19.

Apart from the EPF, other major investors in the SDS are the Seamen's Provident Fund, Coal Miners' PF and other non-government superannuation pension and gratuity funds. These funds provide a social security net to around 6.5 crore organised sector employees and were mandatorily required to invest in the SDS from 1975 to 1997.

Both the interest rate hikes are effective from December 1, 2011 - the same day that returns on the Public Provident Fund and National Savings Certificates (NSCs) were raised to 8.6% and 8.7%, respectively. Traditionally, the interest rate on the GPF, the SDS and the PPF rate, have moved in tandem.

In November, the government had announced a hike in the return on PPF and NSCs. Tapan Sen, Rajya Sabha member from the Communist Party of India (Marxist), told ET that the rate hike has come too late. While the GPF interest is credited on March 31, the interest on SDS investments is paid out on January 1.

"Notifying the rate hikes now has created an anomaly as they have already cut the EPF rate to 8.25% without factoring in the additional income from SDS interest," Sen said. "We will take up the issue in Parliament, as this creates a disconnect between government employees' PF and non-government employees' PF," he told ET.

Retirement funds like the EPFO have already been credited interest at 8% under the SDS for 2011 this January. The retrospectively hiked rate of 8.6% for the month of December 2011 would now be credited to such provident funds on January 1, 2013 along with this calendar year's interest.

Government employees, on the other hand, will receive 8% interest on their GPF savings from April 2011 to November 2011 and 8.6% for the next four months of this financial year.

Source:-The Economic Times

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