Employee Provident Fund (EPF), one of the key platforms of savings in India for nearly all people working in private sector companies and a fund created with a purpose of providing financial security and stability to elderly people, is a hot topic now for more reasons than one. And in what can potentially make it hotter, the ministry of labour and employment on February 10, changed norms on withdrawal of provident fund (PF). In the new scheme of things, you would not be able to withdraw your full EPF corpus in any circumstance before the retirement!
Consider the changes brought in by the Centre in the new scheme of things:
# Retirement age has been increased from the current 55 years to 58 years.
# You can withdraw 90 per cent of EPF balance once you reach the age of 57 years.
# You cannot withdraw Employer contribution to EPF before 58 years.
# EPF membership does not end with leaving the job.
# Government is planning to start online facility for EPF withdrawal in Aug 2016.
Mind you that generally one contributes in these funds when one starts as employee, the contributions are made on a regular basis (monthly in most cases). Its purpose is to help employees save a fraction of their salary every month, to be used in an event that the employee is temporarily or no longer fit to work or at retirement. The amount is deposited at the Employee Provident Fund Organization (EPFO). The investments made by a number of people / employees are pooled together and invested by a trust.
Now the new set of rules have made the EPF withdrawal difficult. And the logic with which the government has done this, is that the main purpose of EPF is to take care of one’s post retirement days. But many people withdraw their EPF before retirement, unable to gain from the power of compounding and defeating the very purpose of EPF. These new rules would force one to accumulate at least one’s employer’s contributions till one attains the retirement age. One must also remember that the withdrawals from the EPF within five years of joining are still taxable. PF is taxable in the year you withdraw it, if service is less than 5 years.
There are however certain problem areas as well. One of the major problems that the new system would face, would come from the inoperative account rule of EPF, which says that an EPF account would not earn interest if there is no contribution for 3 years. The problem that the EPF would face is whether it would pay interest on employer share, which one is not allowed to withdraw. Now onwards, there would be several EPF account without contribution as people would not be able to withdraw their full EPF corpus. So the question remains: will such account earn any interest after 3 years?
The rule says: “A member who ceases to be in employment and continues to not be employed with a covered establishment for at least two months, may be permitted to withdraw only his own share of contribution, including interest earned thereon. The requirement of ‘two months’ period referred above shall not apply in case of female members resigning from the service for the purpose of getting married or on account of pregnancy/ childbirth.”
Advisors suggest that there are few things one must know and keep in one’s mind, before taking any call on EPF withdrawal. Earlier, Employees Provident Fund Organisation (EPFO) subscribers could withdraw the entire amount prematurely by showing not employed anywhere for two months. But under the new provision, EPFO will retain 25 percent of a subscriber’s PF till he attains the age of 58, and his account has to be credited with due interest. In case of emergency, subscribers should be allowed to withdraw a part of remaining 25 per cent under certain conditions. These conditions could be requirement for money for treatment of deadly diseases like cancer or for heart bypass surgery or for any other such situation. PF subscriber can retain his or her Unique Account Number while changing jobs. Let’s now take a look at some other facets of the issue. Consider what investment planners have to say about it.
“As an investment planner, I can offer two arguments that will run contrary to one another, separated by both perception and execution. One, early withdrawal of provident fund will imply end of a guaranteed-rate option for the individual concerned. He will not have access to a fixed rate, which he may sorely require at a critical juncture. Two, staying on course can mean a lot for a person who wants a secure and premeditated alternative -- this is despite the fact that all administered-rate investments will come under pressure in the days ahead,” said Nilanjan Dey, director, Wishlist Capital Advisors.
Remember, rates are volatile and may well remain so. Do I withdraw now or should I wait? This poser may be seen from the following angles.
# Will the move be tax efficient?
# Will it be in sync with my overall fin plan?
# If I withdraw now, will I be able to use the proceeds productively?
Dey said that burdening oneself with a sudden and unplanned cash flow may defeat the very purpose of planning. Also, a better destination for the extra dollop of cash must be lined up right away. “To conclude, I would say: do it if it is efficient and productive. Else, wait till the end or weigh the pros and cons to match changes in goals/aims. The big point is: match it with your risk profile,” said Dey.
There are many who think that the change in the PF rules, once implemented, will impact working people who tend to withdraw PF money between jobs or those planning to use it for either buying a house or for paying medical bills or for children’s higher education or weddings.
The whole idea behind this may be good. The idea is to retain the worker in the PF net and ensure that the money saved under the PF account as social security for old age is used only in case of dire need and not as a savings bank account. But how it goes down among the public remains to be seen.
