New Delhi: Provident Funds' (PF) return may be cut from the current 9.5 per cent if government reduces returns on Special Deposit Scheme (SDS) following a 0.5 per cent cut in small savings rate in the Budget.

The government is expected to decide on SDS rate this month and a decision on further slashing PF rates would be taken after that, Central Provident Fund Commissioner Ajai Singh told reporters at the sidelines of a seminar organised by PNB Gilts on March 5.

"The provident fund currently offers a 9.5 per cent risk-free return. But we can't say what the PF rate would be if SDS rates are cut," he said.

The state-run Employees' Provident Fund Organisation (EPFO), having a corpus of Rs 115,000 crore, has 80 per cent of its investment in SDS that offers 9.5 per cent return.

The remaining portion is invested in central and state government papers (over 12.8 per cent) and 'AAA' rated PSU bonds (8.2 per cent) as on December 2001. These instruments have a maximum return ranging between 13.82-17.5 per cent.

However, if the SDS rate is cut by one per cent, the interest income of Employees Provident Fund Organisation will come down by Rs 477 crore, exerting pressure on the PF rate.

"There is pressure on us to maintain a high return. We now offer 9.5 per cent return. It is unlikely to be sustained in a falling interest rate regime. It is a matter of concern," Sinha said in his inaugural speech at the pension conference.

EPFO has taken up the matter of adequate investment avenues with finance and labour ministries. However, it has ruled out investment of PF in equities on grounds of market manipulations that take place in bourses.

PTI