Do EPF members suffer loss if interest payment is delayed by EPFO? Know how withdrawal works when interest credit is pending Most EPF members have this concern whether they will lose out earning more interest due to this delay. We tell you how it works
The Employees’ Provident Fund Organisation (EPFO) declares the annual interest rate that will be applicable on EPF deposits typically during the last quarter of the financial year. Following the same tradition, in February this year the EPFO announced the new rate applicable for the deposits held during financial year 2023-24 with a marginal increase of the interest rate to 8.25%. However, going by the previous years’ trends it is highly unlikely that this interest will be credited any time soon, especially before the end of financial year on March 31, 2024.“After the announcement of the interest rate for the financial year, the proposal is forwarded to the finance ministry for ratification. Thereafter, the labour ministry notifies the interest rate and the process of crediting interest into accounts begins. However, the delay has been said to be attributable to delay on part of the labour ministry in forwarding the required documents to finance ministry and the usual red-tape and paperwork,” says Manmeet Kaur, Partner, Karanjawala & Co.
Does the delay in interest credit result in loss for EPF subscribers?
If the interest amount is credited on time in other deposits like bank FDs, it is added to the principal and it starts earning more interest. For instance, if the interest rate is 10%, a Rs 100 deposit earns Rs 10 in a year. If it is credited, the new principal becomes Rs 110 and it will earn more interest, which is Rs 11 next year at the same interest rate. So, any delay in credit of interest may lead to loss of interest earning opportunity.
Doesn't this delay of interest credit impact the interest amount that EPF subscribers would have earned during the new financial year on EPF balances, had they got the interest credited into their EPF account right at the end of the last financial year?
“As per para 60 of the EPF Scheme, 1952, interest is calculated on monthly running balance even though they are credited at the end of the financial year. Therefore, the member does not suffer in case of any delay in crediting interest in his account,” says Noorul Hassan, Partner at Lakshmikumaran & Sridharan Attorneys.
Many concerned members have been raising this delay issue with the EPFO and the provident fund body has frequently assured that there is no loss of interest for the subscriber in case of delay. “On various queries made in the past, the EPFO has commented that whenever the interest will be credited, it will be accumulated and paid in full and that there would be no loss of interest,” says Kaur.
EPFO social media handle on X (formerly Twitter) @socialepfo also replied to a concerned member on March 14, 2024 about interest credit process delay and its implications and said, "The process is in pipeline and may be shown there very shortly. Whenever the interest will be credited, it will be accumulated and paid in full. There would be no loss of interest. Please maintain patience." Even last year, this is what EPFO told concerned members regarding the loss of interest due to the delay.
How does EPFO ensure no loss of interest in case of delay in interest credit
To understand why a delay of interest payment does not result in loss of interest earning for EPF subscribers, we need to understand the accounting method of calculating earned interest in the new year that EPFO follows when it credits the due interest of the past year after a delay of many months.
“As per the FAQs published on EPFO India portal, compound interest is calculated on monthly running balance at the statutory rate declared by the EPFO. Interest is added to the closing balance of the member's account,” says Hassan.
“When EPFO credits the previous year's due interest after a protracted period of many months, it uses the compound interest accounting method to calculate earned interest in the next year as per policy. Compound interest is credited on a monthly running balance basis at the statutory rate set for each year as per prevalent policy,” explains Kaur.
What happens when an EPF member withdraws funds before interest is credited
If a subscriber withdraws the deposit before the interest is credited, then does that subscriber get the due interest during withdrawal? “EPF can be partially or completely withdrawn. Complete withdrawal is allowed when an individual retires or if he/she remains unemployed for more than 2 months. However, partial withdrawal is permissible under certain circumstances as per policy. As the interest computed as per policy, EPFO has clarified that there would be no loss of interest,” clarifies Kaur.
What it means is that the withdrawal process is devised in such a way that there is no loss of interest to the EPF member. “In case of withdrawal by the member before the interest is declared/ updated in his account, the interest is calculated from the date it becomes due until the date of withdrawal, and the same will be credited subsequently to his account,” says Hassan.
This story originally appeared on: India Times - Author:Faqs of Insurances
