All You Wanted to Know About Restriction on EPF Withdrawal - Vivek Kaul's Diary
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All You Wanted to Know About Restriction on EPF Withdrawal

Mar 31, 2016

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This is one of the changes that I should have written about at least five-six weeks back, but somehow I did not. Nevertheless, given the long term impact of this change, it's still not very late to discuss it.

From February 10, 2016, onwards, the government has restricted the total amount of money that any contributor to the Employees' Provident Fund can withdraw. As the government notification points out: "The Central Board, or where so authorised by the Central Board, the Commissioner, or any officer subordinate to him, may on an application made by a member in such form as may be specified, authorise payment to him from his provident fund account not exceeding his own total contribution including interest thereon up to the date the payment has been authorised on ceasing to be an employee in any establishment to which the Act applies."

The notification further points out: "The member making an application for withdrawal under sub- paragraph (1) shall not be employed in any factory or other establishment, to which the Act applies, for a continuous period of not less than two months immediately preceding the date on which such application is made."


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So what does it mean? It basically means 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.

The employer's contribution and the interest that has accumulated on it thereon, can only be withdrawn at retirement i.e. at the age of 58. The age of retirement has also been increased from 55 to 58.

This change does not apply to "female members resigning from the services of the establishment for the purpose of getting married or on account of pregnancy or child birth."

Earlier the entire corpus that had been accumulated under the EPF could be withdrawn. And if the corpus had accumulated for five years or more, it was even tax-free.

This was a loophole used by many individuals to withdraw their entire accumulated EPF corpus at the point they changed their jobs. All it needed was a declaration that they were unemployed. The Employees' Provident Find Organisation(EPFO) had no way of verifying this.

Of course, the move by the government to clamp down on total withdrawal of EPF, comes on account of individuals withdrawing their entire EPF corpus when they changed their jobs. This withdrawal led to people not building a good retirement corpus. If viewed from this angle, this is a good move.

It will help individuals build a good retirement corpus. Also, with only partial withdrawal allowed, it will encourage individuals to transfer their EPF accounts when they change jobs, instead of simply declaring that they are unemployed and withdrawing their contribution to the corpus.

Anyone who understands the power of compounding will know that this is a good move, given that as the corpus grows the compounding has a greater impact. An interest of 8% on Rs 1 lakh amounts to Rs 8,000. But the same interest on Rs 5 lakh amounts to Rs 40,000. A bigger corpus in case of EPF is only possible when employees transfer their EPF accounts when they move jobs.

Also, what happens to people who are actually unemployed and can only withdraw the employer's contribution to the EPF and the interest accumulated on it, only after the age of 58?

In fact, as I write this, the EPFO has made a decision to give interest on inoperative EPF accounts. These are essentially accounts in which no contribution has been made by the employee or the employer for a period of 36 months. Hence, what this means is that an individual who is facing long-term unemployment and cannot withdraw a part of his EPF corpus, will continue to earn interest on the corpus that he cannot withdraw.

This was not possible earlier. This change had to be made given that if the government does not allow people to withdraw their entire EPF corpus, it should at least be paying interest on the part of the corpus that cannot be withdrawn.

But all this is just one side of the coin. What happens in case of individuals who actually lose their jobs and face long-term unemployment? In this day and age this is possible. Even though they have money in the form of the employer's contribution to the EPF, and the interest earned on it, they cannot withdraw it.

This may force them to borrow money from money lenders. Hence, it is not fair on them. The trouble is that the EPFO up until now has had no way of verifying if the individual withdrawing the corpus is actually unemployed or is simply changing jobs. This is a weakness at the level of the EPFO.

Given the information technology infrastructure available these days, it shouldn't be so difficult to figure out whether the individual is actually unemployed or is simply moving jobs. Let's say the individual withdraws the entire corpus accumulated under EPF and then takes on another job, his permanent account number(PAN) continues to remain the same. So how difficult is it for the EPFO to figure out whether the person has actually changed jobs? Not very.

Other than people facing long-term unemployment, these days some individuals also like to take a break and go back to studying, in order to improve their job prospects. The money that they have accumulated under EPF can help in paying the part of the fee. People going back to studying at the age of 25-30 are really not thinking about retirement, they are thinking about improving their job prospects by studying more. And if they study more, their job prospects are likely to be better in the years to come.

The EPFO needs to be flexible on this front. A better information technology infrastructure can clearly help.

Also, I think we are reaching a stage, where people who are in a position to manage their money, need not depend on EPF. They need to negotiate with their organisations to have a minimal contribution made to their EPF and the remaining money be paid out to them as a part of their normal salaries, which they can then invest in order to save tax as well as accumulate a corpus. It will also ensure that a portion of their corpus is not stuck with the EPFO until the age of 58. Organisations which are looking to retain talent also need to be flexible on this front.

But given how HR departments in organisations work, I clearly don't see this happening.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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8 Responses to "All You Wanted to Know About Restriction on EPF Withdrawal"

Shantanu Bhate

Apr 17, 2016

Hi Vivek,

Thanks for raising the point regarding EPF withdrawal for students who are currently pursuing higher studies. The current deadline for withdrawing the entire EPF amount (employer + employee contribution) is April 30th 2016, according to online news sources. I believe this is a very short notice for individuals who are currently studying abroad, and thus do not have the resources to complete the EPF withdrawal process by that date. It would really be helpful if the government reconsiders this rule or extend the above deadline.

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Jayant Gharpure

Apr 1, 2016

Reading the comments , I get impression that employees are not aware of law governing EPF.
The law has limit on Salary up to which contribution has to be made. But many employers allow contribution beyond that limit which accumulates to sizeable sum at retirement.
Employers have choice to form it's own PF with approval of IT authorities but I think most employers opt for Govt PF as it saves lot of account maintenece & employee turnover.
Please put the law in brief in the new post

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Venkata Ramanaiah Nalamothu

Mar 31, 2016

Hi Vivek,

Though restricting the EPF withdrawals to only employee contribution may actually benefit some or may be many, but the same is not true for everyone in this age of uncertain job prospects and with people having different aspirations and/or priorities in life.

I take this opportunity to request you and the readers of equity master to have a look at the below petition against this EPF withdrawal norms and see what other EPF members have to say about the same.

change dot org Why should we wait till 58 years to withdraw employee provident fund

#NoEPFWithdrawalLimits

- Venkata Ramanaiah Nalamothu

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Avneesh

Mar 31, 2016

Such restrictions from government raises a bigger question, is this a right thing for government to force the retirement planning like this? It is up to the person to decide how he/she wants to plan for retirement. Government should at most educate and encourage people. The NPS inclusion in tax saving investments was a right approach. But applying restrictions like these are crazy. I had a vision disorder for which I was accumulating money, so my investment horizon was 5 years. Does the government has right to force its age limit of 58 years on me when I need the money after just 5 years?

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D S Mitra

Mar 31, 2016

I would like to comment on this:

pls take my example :

last month I have been asked to move out, by the organisation i am working.
presently i do not have job. my age is of 50.
my Son studying in Australia. I have to pay fees in August
I am completely depended on my PF fund - I am planning to with draw my PF to pay the fees.
Now if the Govt says that i am eligible for my contribution only. Then I am in soup.

In our appointment letter the employer contribution also declared as our CTC. That means companies are deducting the Employee and employer contribution from our salaries. Then how come the government say that employers contribution. What ever corpus fund saved in PF is 100% Employee contribution only, there in no employer contribution. Request to look into.

Like (1)

Gopinath Mavinkurve

Mar 31, 2016

With the introduction of the UAN this tracking should be easy. Also transfers of balances in earlier employment accounts in EPF should be smooth. Withdrawal may also be difficult as a person given one UAN is required to maintain it.... loopholes (if any) cannot be ruled out though!

Regards
Gopinath Mavinkurve

Like (1)

jayant Gharpure

Mar 31, 2016

EPF is a pension plan for non govt employees. it should be protected.as a social security till etirement. Govt has permitted withdrawal of Employee contribution. in any case employers contribution is not his immediate earning . As HR chief in Pvt Sector I have seen tendency on part of employees to draw from PF Fund on on false grounds with no protection at end of employment.

I fully endorse govt policy but period should at least 6 months . I think withdrawal for children Marriage & Education continues.

In my view Govt proposal to tax withdrawal also makes sense but the rate should be 10% on employer's contribution without accrued interest thereon

Like (1)

Balakrishnan R

Mar 31, 2016

Dear Mr. Vivek,
It is nice one.
I request you to kindly write on Gold and Silver adulteration while making jewellery. Middle class people buy gold and silver from their hard earned savings. But in many cases, the content is adulterated. Recently, they found gold coating on jewel made of lead and silver coating on item made of copper. If government takes steps to check the quality it would benefit poor people. I do not know, whether the imposition of 1 % Excise duty will have some scope on this.

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