Updated Provisions in EPF

Written by Vidya Kumar

July 11, 2016

Executive Summary – The government had proposed some changes in EPF to ensure that people do not withdraw the funds meant for post retirement. The changes include increase in retirement age, disallowance of 100% withdrawal of  PF before retirement, restriction on employer contribution withdrawal before retirement and one EPF account for a person irrespective of the employer. Due to widespread protests from different corners, some of the rules related to withdrawal and interest payment have been amended.
The Employee Provident Fund is a means to save money for retirement. It is like a social security account. In February 2016, some changes related to withdrawal of EPF funds were made by the government especially related to withdrawal of funds. There was a lot of discontent brewing everywhere in the country. Labour unions were against it. There were protests by workers. The government therefore decided to update the EPF provisions. 

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Let us look at the changed updates –

  1. EPFO had stopped payment of interest to inoperative accounts from April 2011. Inoperative accounts are those where there has been no contribution for the last 3 years. In March 2016, it has decided to provide interest on inoperative accounts. This will benefit more than 9 crore account holders. Interest on deposits in such accounts will be credited from 1st April, 2016.
  2. It was ruled that 60% of the EPF’s incremental corpus would be taxable from fiscal year 2017 unless the amount was invested in an annuity product that would provide regular pension. This has been reversed and now withdrawal from EPF is fully exempt from tax
  3. There was a provision proposed that prescribed a maximum limit on the amount of employer contribution to Rs. 1,50,000. The government has planned to withdraw this provision. An employer can contribute how much ever amount as long as the monthly contribution does not exceed 12% of the employee’s salary
  4. There were loud protests and pressure from trade unions against the update that restricted complete withdrawal from PF account before the retirement age of 58 years. This rule has been rolled back owing to severe pressure.
EPF Provision Proposed
Update to the EPF Provision
EPFO had stopped payment of interest to inoperative accounts from April 2011. Inoperative accounts are those where there has been no contribution for the last 3 years. In March 2016, it has decided to provide interest on inoperative accounts. This will benefit more than 9 crore account holders. Interest on deposits in such accounts will be credited from 1st April, 2016.
People were happy with this update and this continues forward in the same manner.
It was ruled that 60% of the EPF’s incremental corpus would be taxable from fiscal year 2017 unless the amount was invested in an annuity product that would provide regular pension.
This has been reversed and now withdrawal from EPF is fully exempt from tax.
There was a provision proposed that prescribed a maximum limit on the amount of employer contribution to Rs. 1,50,000. 
The government has planned to withdraw this provision. An employer can contribute how much ever amount as long as the monthly contribution does not exceed 12% of the employee’s salary.
A rule was proposed that restricted complete withdrawal from PF account before the retirement age of 58 years.
This rule has been rolled back owing to protests by trade unions and severe pressure.

An important point to note amidst all these changes is that the government tried to bring theses changes to ensure that people have some sort of financial security during their old age. It was a way of forced saving else the funds get withdrawn for various reasons. It was also a way to sustain EPF and the interest payments. But since it was not a “popular’ step, the provisions were withdrawn.
NPS is another product for retirement savings which is often compared with EPF. NPS is market linked and over a long-term, the returns usually would be better. Tax benefit on investment in NPS can go up to Rs 2 lakhs. The amount of NPS corpus withdrawn and invested in annuity products will not be taxed. The remaining amount will be taxable.

It is helpful to know about the other features of EPF –

  • Interest is given on employee contribution and employer contribution in EPF.
  • The employer contribution is exempt from tax. The employee’s contribution is taxable but it is eligible for deduction under section 80C of Income tax Act.
  • You can check your EPF balance in different ways. You will get a statement through your employer. You can use the e-passbook facility to check the details.

Hope this helps you in understanding the new provisions of EPF.

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