EPFO rate cut is par for the course in today’s clime

While the renter class would naturally be unhappy with this fall, there are multiple ways of looking at the issue. 

One, while I am not privy to what computations have gone into arriving at the decision, if it is the case that by paying at 8.80% the Trust will run into the red, the decision is justified. Otherwise, it may not be fair. After all, these investments are for retirement income, and there is no significant reason why it should be disturbed. If the argument is that 0.15% is a small cut, one can turn around and say that if it is low, then why to make the cut at all ?

Two, and at a very different level, one must consider the fact that even 8.65% is quite generous. Let’s look at it this way. If you invest Rs 100, you will earn 8.65%. This earning is not taxed. Hence your after-tax rate on the investment is also 8.65%. Now if you were in the 30% tax bracket, it would mean that an alternative investment would have to earn a pretax rate of 12.35% to be equivalent to the EPF investment. 

Put differently, the EPF earning is the equivalent of making 12.36% pre-tax. Not too many investments provide you with that luxury. Apparently, the equivalent pre-tax rate will change with your tax rate. 

If you are in the 20% bracket, the corresponding rate is 10.81%, and if you are in the 10% bracket it is 9.61% 

The short point is interest rates on investments have begun to fall. Already banks have dropped the prices sharply. It is time that lending rates too fall. Otherwise, it would not be fair.