Delay in EPF interest payment: Is there a loss to subscribers?

Will the delay in EPF interest payment for 2018-2019 result in a loss to subscribers? Will it affect compounding? We show that it does with some simple examples.

Delay in EPF interest payment Is there a loss to subscribers

Published: December 13, 2019 at 11:40 am

Last Updated on

The EPFO started to credit interest into subscriber accounts for 2018-2019 only from Sep, Oct 2019. Many subscribers have still not got the interest credit with some being intimated that they could be further delays. Does this represent a loss to subscribers? Will if affect compounding? Will EPF rate of return be effectively lower? Let us find out.

The answer ought to be a no-brainer. If the borrower is a non-government organisation, say a bank or corporate bond issuer or a chit fund, any delay in payment  (interest or principal or both) would be equated to a fraud or a scam.

Since the EPFO if a government-backed body, interest payments delays are considered as nothing more than an inconvenience by subscribers who have no immediate need for the money.

The reasoning provided is often this:  the money is coming from the government, even it if is delayed, there will be no loss. Some also point out that though the interest payment is delayed, the correct interest will be credited and therefore there is no loss to the subscriber.

This kind of reasoning is flawed as time has a monetary value. This is routinely exploited by insurers to offer small returns under the guise of guaranteed payments. See for example: Why Time is Money and How Life Insurance Plans Exploit it!

Any delay in payment due will result in a lower internal rate of return (aka annualised return for multiple payments). For an introduction see: What is XIRR: A simple introduction. This is a loss to all EPFO subscribers whether they wish to redeem, exit or continue in the scheme.

Let us consider a simple example.  Assume that you pay Rs. 1000 to the EPFO starting from April 2018. The payments are shown as negative entries to help with the internal rate of return calculation in Excel.

EPF internal rate of return illustration with zero interest

DateAmount
01-04-2018-1000
01-05-2018-1000
01-06-2018-1000
01-07-2018-1000
01-08-2018-1000
01-09-2018-1000
01-10-2018-1000
01-11-2018-1000
01-12-2018-1000
01-01-2019-1000
01-02-2019-1000
01-03-2019-1000
31-03-201912000
XIRR0%

Twelve payments of Rs. 1000 are made and at the end of the financial year, the balance (shown as positive) is Rs. 12,000. So naturally, the XIRR or internal rate of return is 0%. Now let us add to this an interest payment.

EPF internal rate of return illustration with interest paid promptly

DateAmount
01-04-2018-1000
01-05-2018-1000
01-06-2018-1000
01-07-2018-1000
01-08-2018-1000
01-09-2018-1000
01-10-2018-1000
01-11-2018-1000
01-12-2018-1000
01-01-2019-1000
01-02-2019-1000
01-03-2019-1000
31-03-201912000
31-03-2019510
XIRR8.000%

When an interest of Rs 510 is also credited the XIRR becomes 8% The XIRR depends not only on the amount of interest but also on the date of credit.

EPF internal rate of return illustration with interest delays

The IRR decreases little by little each day the interest rate is delayed.

DateAmount
01-04-2018-1000
01-05-2018-1000
01-06-2018-1000
01-07-2018-1000
01-08-2018-1000
01-09-2018-1000
01-10-2018-1000
01-11-2018-1000
01-12-2018-1000
01-01-2019-1000
01-02-2019-1000
01-03-2019-1000
31-03-201912000
26-12-2019510
Interest payment delay (days)270
XIRR7.6%

If the same Rs 510 is credited 270 days later in Dec 2019 instead of Mar 31st 2019, the XIRR drops to 7.6%. Whether this is a small drop or not is a subjective argument best left to readers. The simple fact is, interest payment delays impact IRR and is an effective loss to the subscriber.

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Time is money illustration

The delay in interest credit of 270 days can be viewed as a monetary loss. Assuming no delay in payment, what interest would provide the same IRR corresponding to the delay, that is 7.6%.

DateAmount
01-04-2018-1000
01-05-2018-1000
01-06-2018-1000
01-07-2018-1000
01-08-2018-1000
01-09-2018-1000
01-10-2018-1000
01-11-2018-1000
01-12-2018-1000
01-01-2019-1000
01-02-2019-1000
01-03-2019-1000
31-03-201912000
31-03-2019483
XIRR7.6%

A 270-day delay is equivalent to a loss of Rs. 27 (per thousand rupees invested approximately).

Will delayed interest payment affect compounding?

Yes, it will as long as there is a delay in interest payment.  The payment delay this year is not a first, it occurred in 2018 as well. If at the time you make a partial withdrawal, take a loan or exit the EPF, the outstanding balance is not what it is supposed to be, the above-mentioned loss will become real from just notional.

At the present time, there is no distinction between a notional and real loss as the future is uncertain. The EPFO has a history of poor management and poor fiscal prudence.

The Comptroller and Auditor General of India found an Rs. 1,336 Crore “gap” in the EPFO books due to over withdrawal of funds after offering excess interest. Therefore the EPFO can hardly be called a credit-worthy borrower.  Anyone else would have been assigned a credit rating of “D” (= default).

As reported earlier, the EPFO is barely making ends meet and this is before the Supreme court judgement on higher EPS pensions: Higher EPS Pension: Can EPFO pay Higher Pensions or will it go bust?

According to the livemint, more than 100,000 subscribers withdraw from or settle their accounts each month! So these delays are impacting a big chunk of the subscriber base.

Considering the fact that employee contributions are mandatory, the EPFO should be made to pay a penalty for interest rate delays, but that would be like increasing the interest rate on an already unreliable borrower!

Going forward, the only viable options are (1) keep interest rates closer to market rates, (2) switch to NPS. Faster accounting and higher accountability is also necessary but will not be easy to come by.

For now, statements like, “there is no loss in interest”, “the correct amount will be credited in future” etc may placate a largely ignorant subscriber base who do not understand the time value of money. The fact remains, payment delayed is payment denied.

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12 Comments

  1. Sir,
    Is the credit not value dated? When crediting interest for 2019-20, will EPFO not consider the interest amount for compounding wef 1.04.2019? In case of members withdrawing the balance, EPFO is crediting interest upto the month preceding the month in which settlement is made.

  2. A govt backed entity will pay arrears/pending dues in the form of additional interest during final settlement. EPFO was created to generated pension fund for retirees. However, people have violated norms while withdrawing money from epfo mostly from pvt sector.
    If epfo was something like 401k which levies penalty on premature withdrawals then things would have been different.
    EPFO is far better than nps which has restrictions and recommends to buy annuity with final corpus in order to provide tax benefits.

  3. This is only a technical loss. No loss in absolute terms to the subscriber as at end of the subscriber will get the correct amount.

    But I agree government should also pay on time as another borrower otherwise penalty should be levied.

  4. Dear Professor,
    Not only your understanding of maths is weak your understanding of EPFO interest crediting mechanism is also far from reality. Further the concept of time value of money seems not understood by you. So it is advised kindly not to spread half information and false information. There is no loss to member on any of the grounds you mentioned. If someone withdraws his money in between of crediting interest he still gets interest as per the rates of last year. In fact at the time of decreasing interest rates he gets more benefit if interest is not declared at the time of withdrawal. Once interest is declared, the crediting of interest in EPFO is just a book updating software process.

    1. Dear Santosh,
      If the crediting of interest is ‘just’ a book update using some software, why has it not been done as yet for all subscribers? And this is not the first time this is happening with this govt.

      1. its because huge amount of Data processing involved and technological limitations the accounts are updated in small batches. However it has no impact at all on individual member in any case. if a member withdraws money in between before updating, his individual accounts gets updated at the time of settlement.

  5. I can explain this thing.
    EPFO board declared this interest based on the profits they made last year. Now this profit is mostly the interest on govt bonds which the govt has to pay the board. But govt has a tight rope on the fiscal deficit. So if they show in their books the money has been paid, govt book will look bad on fiscal deficit front. So they are not releasing it even though it is only a paper entry.
    Last year they paid properly because it was election year. There is no such hurry for next 4 years

  6. Dear Pradeep,
    EPFO interest is not connected with the fiscal situation of government in a way as explained by you. Further once interest announced it is available. for the reasons of non updation of Pass Book please see my earlier comments.

  7. Dear Santosh,
    There is no need of a supercomputer to remit interest in PF accounts. Interest was credited before June for many many years until couple of years back, all of a sudden they find it very hard and had to do it over a period of 10 months? Please this forum has largely educated people, so you may try give a more compelling reason.

  8. There are a lot of flaws involved with EPFO policies. These policies disturb both employees and employers. EPFO was created way back in the 1950s, back then India was a different country socially, financially and politically. Probably the need of that time was to have an entity like EPFO that worked the way it does. But now, 70 years later( imagine 70 years ), a lot has changed since then. India and Indians have grown in terms of their financial, social and economic needs. Now the weird and unpredictable rules and policies of EPFO don’t hold good for majority of us. Now Indians are much more informative and alert in terms of how and where they want to invest their money. And it should entirely be up to their sole discretion as to what they want to do with their money. But the stupid EPFO comes in the way

    For instance, EPF subscription is forcefully imposed on us, that’s where all the problem starts. There is a reason EPF users are called EPF hostages and not EPF subscribers. A big chunk of our salary( 24% of basic, OMG!! ) goes into the investment product that we don’t like, at least I don’t like it and trust me there are many others who don’t like it either. Instead I would have wanted my money to get invested in ELSS which could fetch me 12-15% of interest over long time instead of just 8-9% in epf. So to summarize – :

    1) Forceful investment imposed on us by the government, whether you like it or not, you have to bear it.
    2) A very strong dependency on employer to get the job done. While a lot of processes have become online but a strong dependency on employer to get even tiniest of things done could be a headache sometime. What if someone did not have good relationship with the previous employer in that case previous employer could well exploit the situation.
    3) Low interest rate. Just a mere 8-9% interest is not enough if the inflation rate itself revolves around 5-6%.
    4) Not 100% of the invested amount earns interest. Ok, so in previous point I mentioned that interest given is less, but to make things worse, this interest rate is not applied on the entire employee+employer invested amount. You must be aware that the pension amount does not earn any interest and just kept as it is.
    5) Irresponsible behaviour and slow processes. Now who is not aware of the irresponsibility of these EPFO workers, processes also crawls like a snail. One such example of slow processes is explained in this above article itself that the interest that should get credited in March, actually gets credited 6-7 months later. No matter what excuse EPFO gives, or whose mistake it is in terms of delay, the point is it is the subscriber who gets affected after all.
    6) Headache of transferring PF amount to new account after each job change. This point better explains the part where I mentioned that the 1950s social conditions of an Indian are a lot different than today’s. The epfo policies where created keeping 1950s era in mind. Back then people had single job throughout their life. But now in private sector people change job more often and transferring amount after each job change is just a useless redundant task.

    I can go on and on if I wanted to but I’ll stop here. So what probably is the solution? I’d say employees should be given a fair option to either opt for EPF in a job or not. Next, most of us would not opt for epf, hence we should go for NPS instead and there are many reason behind it.
    1) Higher returns. Since NPS is mostly equity( 75% till age of 50 years ), hence it is bound to fetch more returns over a long period of time
    2) Everything is 100% online, and when I say everything I mean everything. There is no involvement of previous employer or any dependency on it.
    3) Just one NPS account for the whole life. No struggle to get new NPS account each time we change the employer and then transferring the amount.
    4) Invest at your will whenever you want. If you wanted to invest more in EPF, through Voluntary PF, then you cannot change this option for whole one single FY. Cancellation or change in amount of VPF is not allowed in the middle of a FY.

    I know there are still few things in NPS that need attention. Like the tax factor that the time of maturity etc. but NPS is new and constantly evolving. I am sure things will get better over time with NPS. Considering the reader is 30-35 years old now, then he has good 25-30 years of time till his NPS matures. By then a lot will have changed in NPs, hopefully for good. What effectively I am saying, if I were to choose between EPF and NPS, I’d choose NPS any day.

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