The Case for EPF Rollback
- In Economics
- 10:23 AM, Mar 12, 2016
- Ranabir Bhattacharyya
The present EPF roll back debate has been cause of concern for those who belong to the salaried class of India. Before analyzing the current scenario, one has to understand and introspect several aspects of the EPF rules and regulations. How EPF is different from other public and private individual investments and its impact is important not only from individual monetary perspective, but also from India's revenue domain as well. The history of Employees' Provident Fund aka EPF began with the Employees' Provident Fund Allowance on 15th November 1951. In the very next year, the above mentioned act was replaced by Employees' Provident Funds Act, 1952. Incidentally in the same year, the Employees' Provident Funds Bill was introduced in the Parliament and subsequently Employees' Provident Funds Act & Miscellaneous Provisions Act, 1952 was implemented all over India except Jammu & Kashmir.
The most vital question is-who all are within the periphery of this provident fund scheme; what amount do they need to contribute and in what time period. Besides that the question worrying everyone was whether individuals will get tax exemptions in time of maturity. Certainly, as per the EPF rules, individuals having basic salary of Rs.6500 and above, have to contribute compulsorily to the EPF fund on a monthly basis. For every individual within the periphery of EPF fund, both the employee and the employee have to cumulatively contribute 12% of the individual's basic salary. Many economists term the whole system of EPF to be a retirement benefit fund with lesser hassles and bringing more benefits to the senior citizens. From 2012, Dearness Allowance aka DA is also considered while calculating the monthly deduction for EPF. The categorization of the EPF is also extremely interesting. It is said, that a monthly contribution from an employee goes directly in three EPF segments namely EPF, EDLIS (Employees' Deposit Linked Insurance Scheme) and EPS (Employees' Pension Scheme).
The flexibility of the EPF interest rate helps the contributors in the long term as Central Government decides on the rate depending on the revenue generated by this fund and existing market conditions and market debts. Interestingly, contributors can give more than 12% to their EPF funds but the concerned employer or authority is not at all compelled to match that. Such cases where individuals opt for investing or contributing for EPF fund are referred to as contributory contributions. Often there is confusion among employees, in times of shifting or changing jobs. The existing rules clearly state that an individual can certainly withdraw the EPF money, provided he gives a written declaration that he or she won't be in any organization in the six months. In all other cases of new jobs, the account is automatically transferred with some legal formalities and the new employer submits the calculated sum of money along with the employee.
One of the basic advantages of EPF is its flexibility in allowing individuals to withdraw partially for emergency cases such as house construction, higher education, marriage, illness and other scenarios. Within the service period, any individual can withdraw money from EPF thrice and in no condition they can withdraw more than 50% of their contributions. The accumulation of individual contribution, added with interest, makes EPF a popular investment and a public assurance scheme. Be it retirement or resignation of an individual or even death, the flexibility in mobilizing the EPF fund, has made investment in this category an almost mandatory one. There has been considerable amount of confusion between EPF and PPF among most Indians. PPF or Public Provident Fund is not mandatory and even those employed in the unorganized sector or self employed ones can also open PPF accounts. It is considered to be a useful tool to save tax deductions within the legal framework of Income taxes. All individuals contributing in PPF or EPF have their unique numbers and can check the balances as and when required.
In the recently concluded Finance Budget 2016, Finance Minister Arun Jaitley opted for EPF tax proposal. The basic aim of such a proposal was to garner maximum revenue to Central Government as EPF forms chunk of revenue obtained from salaried employees in Indian context. In his Budget for 2016-17 speech, Arun Jaitley had proposed to tax 60 per cent of the EPF contributions which are created after April 1, 2016 at the time of withdrawal. Added to that, he also proposed to exempt such taxable amount from income tax provided the amount was invested in pension annuity scheme. The impact of such an announcement was immediate and nationwide there was outrage. No doubt, since its formation, EPF has given much impetus to social security in post retirement age.
Not only the opposition parties, but also those from employee unions strongly objected to this proposal, saying it would endanger the social security of the retired population. Forced by public outcry Finance Minister Arun Jaitley did the right amount by back tracking and announced rolling back the proposal, giving much relief to the great Indian middle class. He clarified saying, "In view of the representations received, the government would like to do comprehensive review of this proposal and therefore I withdraw the proposals in para 138 and 139 on my budget speech. The proposal of 40 per cent exemption given to NPS subscribers at the time of withdrawal remains," After the budget speech, Arun Jaitley stressed on the fact that Government was intending to encourage those from the private sector to invest in pension annuity. Thus in the present scenario, it remains to be seen how the present Government would achieve such a reality, bringing the salaried class of India under pension scheme.
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