The finance ministry has rejected the 9.5% interest pay out proposed on provident fund savings for 2010-11 saying the ‘surplus funds’ found by the PF department from its past accounts were ‘unverifiable.’  Labour Minister Mallikarjun Kharge had recommended raising the employees’ provident fund (EPF) rate to 9.5% in September 2010 after the PF department’s accounts revealed a surplus from the past.

In a tersely worded communiqué to Labour Secretary Prabhat Chaturvedi, Finance Secretary Ashok Chawla has termed the calculations used to arrive at the PF rate as ‘incorrect.’

Chawla’s letter, written with the express approval of Finance Minister Pranab Mukherjee, also asked the labour ministry to get the Employees’ Provident Fund Organisation (EPFO) to first update and settle all pending accounts of its 5 crore members.

The EPF rate has been at 8.5% since 2005-06 and the rate would have stayed the same in 2010-11 as per its earnings. But a review exercise of EPFO’s Interest Suspense Account, where EPF’s annual income is parked till it is distributed to members, revealed a surplus of about 2,000 crore.

While the EPFO board cleared the 9.5% PF rate on this basis, the finance ministry had commissioned a special audit of the accounts in question by the Comptroller and Auditor General of India (CAG).

The CAG found that the surplus amount cited in the suspense account can not be verified till all accounts are updated by the EPFO. The CAG usually audits EPFO’s accounts at the end of a financial year. Chawla has cited the CAG’s findings while communicating the finance ministry’s refusal to notify the PF rate.

EPF interest is manually credited to workers’ accounts. On 31 March 2010, the suspense account had a balance of 27,000 crore – which means EPFO’s dated systems had not credited that much interest due to its 5 crore members’ accounts. More than 11 crore account statements were pending on April 1, 2009.

The PF department has admitted that the huge balance in the suspense account would ‘ideally’ vanish if all past years’ annual accounts were updated. PF officials also explained their surplus calculations to the finance ministry in at least two separate meetings. But their defence did not cut much ice.

“The problem is that the PF department classifies worker accounts that haven’t been credited interest due to them as pending for the ‘current year’ and pending for the past,” a senior government official told media.

If some accounts have past interest credits pending, it is not possible to ascertain for how many years they have not been updated. Till the amounts in the suspense account can be broken down to verify how many members’ account credits are pending for how long, a ‘surplus’ can’t be claimed from the same funds.

The labour ministry is likely to request the finance ministry to reconsider its decision. It is expected to point out that as per the rules, the EPF rate is announced at the beginning of a financial year and is always based on estimated inflows and incomes.

The finance ministry has already notified a tax-free PF rate of 8.5% for 2010-11, effective from September 1. Historically, the tax-free PF rate notified by the income tax department has never been lower than the EPF rate for the year.

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