The tax overhang on the employee provident fund (EPF) may be gone, at least for now. But those with EPF accounts are still worse off than before. A rule introduced before the Budget prevents you from accessing your entire EPF corpus before the age of 58.
Apply for withdrawal before that and you will get back only your contribution including interest. The employer’s contribution including interest stays locked in the EPF account till the age of 58.
More importantly, it restricted withdrawals from the EPF account before the age of 58 to only the employee’s contribution and interest earned on it.
At 12 per cent of Basic and Dearness Allowance, employers match employees’ monthly contribution to the EPF account.
Earlier, if you resigned from your job, didn’t take up a new one for two months, and applied for withdrawal of your EPF, you got back the entire corpus – both your and the employer contribution plus interest earned – tax free.
From February 10, you will not be allowed to withdraw the employer contribution and interest before the age of 58.
The move by the Ministry of Labour may be well-intentioned. The objective seems to be to force salaried individuals retain at least a portion of the EPF corpus for their retirement years, even if they quit working earlier.
“Basically, EPF is a long-term retirement account, and it should remain so. People should not consider it like bank accounts and make withdrawals a routine. Also, earlier, accounts were not computerised, so when people changed jobs, they thought it is easier to withdraw. Now, in case of job change, one can just apply online and it will be automatically transferred,” said VP Joy, Chief Provident Fund Commissioner. But there are concerns.
Interest concern One, will the employer’s contribution retained in the account continue to earn interest?
As per current rules, if there is no contribution to the EPF account and it remains idle for 36 months, the account becomes inoperative. No interest is paid on such inoperative accounts after 36 months. This could mean that a large chunk of money - belonging to the employee - would not earn interest for several years.
Say an employee quits working at the age of 45 after working for 20 years. He would have accumulated a sizeable sum as the employer’s contribution in his EPF account. But this will not earn interest after three years. So, for 10 years, from the age of 48 to 58, the amount will remain idle without earning interest – this will mean a huge opportunity cost for the employee.
Tax experts think there could be a work-around. Neha Malhotra, Executive Director – Taxation, Nangia & Co says, “One could be worried that the EPF account would become inoperative and interest may not accrue on the balance lying in the account after 36 months. But ideally, the EPF membership is deemed to be terminated only when full EPF balance is withdrawn. So, one would still be an EPF member and hence the account may be deemed operative and interest could continue to accrue on the balance - that is, on the employer’s contribution.”
Reports suggest that the government is considering clarifying that interest will be paid on such accounts, but the clarification has not come so far.
Then, there is the debate on whether the government should be paternalistic and decide when and how the employer should spend his money. Employees who have quit their jobs, voluntarily or otherwise, may have a genuine, immediate need for the entire EPF corpus for various purposes. Also, the rule could be a setback for those planning to quit employment and becoming self employed.
Ankur Kapur, Founder, ankurkapur.in, an investment advisory firm, says, “Not allowing entire withdrawal of the EPF corpus is a bad idea, especially when the government is keen on promoting entrepreneurship in the country through schemes such as Start Up India, Stand Up India. First time entrepreneurs need a lot of capital which is not easily available from external sources. They depend on the EPF corpus to get started. The government should remove the restriction on the corpus withdrawal.”
(With inputs from Aditi Nigam, New Delhi)