While the government has defended its move to cut rates on small savings schemes from April 1, 2016, its own employees are anxious about the prospect of a similar lowering of interest on their retirement savings under the General Provident Fund or GPF.

Historically, the rate of return credited to all government employees under the GPF has moved in tandem with the returns on public provident fund or PPF investments (see graphic).

On Friday, the government announced that the PPF rate has been lowered from 8.7 per cent this year to 8.1 per cent for the first quarter of 2016-17.

For 2014-15, the government had notified the interest rate on small savings schemes and GPF on the same day — March 4, 2014. Last year, the small savings scheme returns were announced on March 31, 2015, while the rate of return on GPF and other state PFs was notified on April 21.

The 8.7 per cent rate on GPF and other government staff PFs remains in effect till further orders. Last April, while notifying the interest rate on all state PFs including the GPF, the government said it had decided to link these rates to the PPF rates for 2015-16. However, the PPF rates would now be recalibrated every quarter.

“Historically, the rates on PPF and GPF are both administered and have tracked each other, but now with the PPF returns being switched to a new system of quarterly resets, there may be a need for a rethink,” a senior government official said on condition of anonymity.

The official argued that the GPF is distinct in nature from the PPF which is a savings scheme competing with bank deposits that anyone can tap, while GPF is a genuine retirement benefit for government employees. “This may not be easy to explain for the government,” he said.

Purely notional

A retired government official said that unlike EPF or PPF, where actual money is invested, a GPF account is purely notional.

“There is no GPF corpus per se. A part of our salary is deducted (not paid) and the government makes a notional credit to our PF account, where interest is credited annually, and the final amount due to you is paid at retirement on a Pay As You Go basis. Since there is no cash flow or actual investment in underlying securities, why should the returns be arbitrarily linked only to this market-linked instrument of PPF?” he asked.

On the other hand, the PPF is considered an easily accessible long-term investment instrument for millions who are not employed in the formal sector and therefore, have neither GPF nor EPF account. EPF accounts are available to all employees earning upto Rs 15,000 a month in firms employing twenty or more workers.

There are an estimated 3.2 million central government employees in the country, apart from millions of state government employees who are usually paid the same rate of return as the GPF. The 8.7 per cent rate for GPF is also paid on nine other provident funds that include funds dedicated to ordnance factories’ and naval dockyards’ workmen, armed forces personnel, defence services officers.

(This article first appeared in The Hindu dated March 21, 2016)

Published on March 21, 2016