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Editorial Today – Rollback of New PF withdrawal norms

Rollback of New PF withdrawal norms

What is EPF?
The Employees’ Provident Fund (EPF) has traditionally been the only tool for most Indians, especially the salaried class, to save for their retirement corpus.
Legally, any employee who has a monthly salary up to Rs 15,000 can be part of it, but most Indian companies offers it to all employees as part of the salary package. If you have a higher salary, you can opt out of it at the beginning of your career, if your employer permits. Once you opt for EPF, you cannot opt out of it.

Contribution:
The mandatory contribution is 12 per cent of an employee’s basic salary, credited to the employee’s account. The employer contributes the same amount. Of the latter, 3.7 per cent (of that 12 per cent) goes towards the provident fund component; the other 8.33 per cent goes towards pension.

Interest:
EPF is a defined benefit scheme, where the interest rate is set every financial year. For 2015-16, the rate is 8.8 per cent.

What is dormant account?
When employees change jobs, they usually either withdraw their EPF accounts or simply ignore these, if the balance is not much. Also, the income tax applicable on withdrawal before five years could be a reason why employees don’t withdraw the money.

Payment to dormant account:
These are the ones where there’s been no contribution for three years. Of the 150 million EPF accounts, 92.3 mn are dormant or inoperative. Interest will be paid on these accounts from April onwards, the government said. In the new rules, interest will also be paid for three years after members reach 58 years. This will apply to those who choose not to withdraw it after retirement. They can thus earn interest till 61 years of age. Accounts will become inoperative only if the employee has settled abroad permanently and fails to withdraw the balance in a period of three years.

Withdrawal Norms:
If you have been out of work for two months or for major life events such as marriage of self or child, education, buying a house, medical emergency, etc, you can withdraw your EPF.

What was the changed rule? (Recent Controversy)
The government’s notification said from 10 February, 2016, an employee contributing to the Employees’s Provident Fund will not be allowed to withdraw the entire corpus. It basically meant that anyone who has been unemployed for two months or more can now withdraw only his own contribution into the Employees’ Provident Fund and the interest that has accumulated on it.

Further, the second portion i.e. the employer’s contribution to the EPF and the interest accumulated on it can only be withdrawn at the retirement age of 58 years.

Moreover the retirement age limit for filing claims has been increased from 54 to 58 years.

It was stipulated that the requirement of two months unemployment will not apply in cases of women members resigning from the services for the purpose of getting married, on account of pregnancy or child birth.

But government had to rollback its amendment because of protest.

Centre’s rationale was to ensure people don’t fritter away their PF savings during their working life is good in theory. But it does not take into account the fact that people often withdraw EPF balances when they change jobs, simply because transfers are not handled smoothly at the PF office.

Thus micromanaging retirement choices for the privileged few (as formal sector accounts for only 10 percent of total workforce) is a waste of time. Redoubling efforts at providing genuine social security for the other 90 per cent of the workforce is a far better idea.

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