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Why are People So Touchy About EPF

May 2, 2016


There has been a lot of drama surrounding the changes that the Narendra Modi government has tried to introduce in the Employees' Provident Fund (EPF) in the recent past. It started with the government trying to tax the EPF.

In the budget speech made in February, 2016, the finance minister Arun Jaitley said: "I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016."

Just the word tax was enough to get the protests going. The social media went berserk. And so did television channels as well as newspapers, protesting vehemently against this move.

In clarifications that followed the actual plan of the government came forth. The change actually applied only to private sector employees who earned more than the statutory wage of Rs 15,000 per month.

If these employees chose to withdraw 100% of their EPF corpus, 60% of the corpus created after April 1, 2016, would be taxable. Further, there was a way around it. As the clarification later issued by the finance ministry pointed out: "It is expected that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% of the remaining Corpus is invested in Annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity."

The clarification did not help. The protests continued and the proposal to tax EPF was then withdrawn. All this is well known by now. The question I want to ask here is, what led to the people protesting as vehemently as they did?

The middle class in this country is not known to protest against anything. They generally get around to accepting most things over a period of time. So what happened here? The answer perhaps lies in what behavioural economists refer to as the phenomenon of loss aversion.

And what is loss aversion? As economist Robert H Frank writes in his new book Success and Luck-Good Fortune and the Myth of Meritocracy: "[The] sense of entitlement to the fruits of one's labours may owe much to the phenomenon known as loss aversion. One of the most reliable findings in behavioural economics loss aversion refers to the fact that people will fight much harder to avoid a loss than they would to achieve a gain of the same amount. Since most...people work hard for the money they earn, it feels like they own it, and that makes taxation feel like theft."

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And this precisely what explains all the protests that erupted against the government trying to tax the EPF. While protests in this case were justified, what followed was uncalled for.

Before trying to tax the EPF, the government had put out a notification on February 10, 2016. As per this notification an individual investing in EPF could withdraw only his contribution made to the EPF and the interest accumulated thereon, in case he was unemployed for a period of at least two months.

Before this notification was issued 100% withdrawal was possible. Further, those who changed jobs also withdrew 100% of their accumulated EPF. All they had to do was to declare that they were unemployed. This wasn't a healthy phenomenon given that money invested into EPF is essentially being put aside for retirement.

The Employees' Provident Fund Organisation (EPFO) was not structured to be able to keep track of individuals changing jobs. The introduction of Universal Account Number (UAN) along with the February notification, made it impossible for those changing jobs to withdraw 100% of EPF. And this was a good move.

But there were huge protests against this as well. And the government had to withdraw this notification. In fact, this happened primarily because people saw this as another attempt of the government to play around with their EPF and loss aversion kicked in.

In fact, the media created confusion around the question, by asking questions like why an employee should not be allowed to withdraw money for weddings, education of their children, building/buying a home and medical emergencies.

Take the case of an editorial that appeared in The Times of India on April 21, 2016. It asked: "People may need to withdraw from EPF to tide over a situation when they are between jobs. Or they may want to build a house. Or they may face a medical emergency. In all these cases EPF withdrawals enhance their economic security, which was the core idea behind EPF. There is no case, therefore, for debarring such withdrawals."

This gave the impression that no withdrawal from EPF was possible anymore. This was totally wrong. Those unemployed could withdraw their contribution to the EPF as well as the interest accumulated on it.

Further, the EPF already had rules for money to be withdrawn for medical emergencies, housing, education as well as weddings. These rules were not fiddled around in the new notification issued on February 10, 2016.

The Section 68K of the Employees' Provident Fund Scheme 1952, allows an individual to withdraw up to 50% of his contribution and the interest accumulated thereon, "for his or her own marriage, the marriage of his or her daughter, son, sister or brother or for the post-matriculation education of his or her son or daughter."

As far as medical emergencies are concerned, the amount that can be withdrawn from the EPF should not exceed, the individual's "basic wages and dearness allowances for six months or his own share of contribution with interest in the Fund, whichever is less." Withdrawal is allowed for buying/building a home as well.

After hungama around this move ended, the government decided to cut the interest rate on the EPF for 2015-2016 to 8.7%. This was 10 basis points lower than the 8.8% recommended by the Central Board of Trustees(CBT) of EPFO. Further, it was 5 basis points lower than the interest of 8.75% paid in 2014-2015 and 2013-2014.

This means that the interest paid in 2015-2016 would have been Rs 50 per lakh lower than what was paid in 2014-2015. This is a very small amount. But there were protests against this move as well, primarily by trade unions.

The explanation for this again lies in loss aversion. People now believe that the government is trying to play around with their hard earned money. And any small change attempted on part of the government is likely to lead to protests.

These protests finally led to the government reversing its earlier decision and deciding to pay an interest of 8.8% on EPF for 2015-2016, as recommended by the CBT.

The question that crops up here is, what economic reforms can be expect from a government which isn't even in a positon to pass on an interest rate cut of 5 basis points (from 8.75% in 2014-2015 to 8.7% in 2015-2016).

Further, the government could have handled the situation better by at least trying to explain the logic behind its moves. But that doesn't seem to have happened and it has ended up with creating needless trouble for itself.

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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19 Responses to "Why are People So Touchy About EPF"


May 8, 2016

The main reason why people withdraw their PF while moving from one job to another is to ensure that their Employer's contribution can be collected effectively as there is no mechanism to ensure that the employer's contribution is correctly transferred to the employee. It is impossible to chase a 5 year old story later on.

Additionally PF withdrawal is a bureaucratic procedure with a lot of red tape, unlike encashing an FD or PPF. An employee is not assured of receiving the full content of his/her EPF account until all the paperwork has been completed properly and the money transferred to the bank account. It will be better to Scrap the EPFO and force the funds to be transferred to the PPF system or converted to Fixed deposits in SBI with long maturation dates.



May 3, 2016

Look at the condition of those who are not members of EPF (being in unorganised / very small sector) and have planned their retirement by way of contributions to PPF. Govt. is now treating PPF account as mere saving scheme and not as retirement corpus and have reduced interest drastically (8.1) with further provision of quarterly review (in all probability interest rate will get reduced to about 7.5 % very shortly)
Retired people who do not get pension are very badly hit by this, due to reducing income and increasing expenses due to inflation. Vows of this category is not considered/heared/discussed as they are not unionised. I look forward to the day when reasoned and balanced decisions will be taken to set this right like in case of EPF.


Deepak Padher

May 3, 2016

You are always playing with the words and creates illusions.
You say - "what economic reforms can be expect from a government which isn't even in a position to pass on an interest rate cut of 5 basis points"

It is as if all the reforms will be carried out with the tax on EPF and interest on EPF only. Govt. is not smart and clever enough to find out other avenues or they do not want to find.

If the present Govt. would have told people that they are going to tax more on honest tax payers for running the Govt. then whole scenario would have been different. But they told people that they are going to bring black money inside within 6 months.



May 3, 2016

Reducing interest on accumulated retirement fund in the name of economic reforms sounds naïve !!
In fact reducing interest rates work against the objective of creating a sizeable corpus for retirement. For every percent of interest reduced, the employee has to earn or save that much more.
This is common sense.

Before doing anything with the EPF amount, the Govt should first streamline the accounts and bring in transparency and easy reconciliation. Introduction of UAN is just a beginning, not good enough though. Just take a look at any employee to verify how up to date their account statements are and you will see the sad reality. Blaming employees for withdrawing when they switch job may look fine, but just find out how many of them have applied for transfer of these accounts and how many have really happened.
There is much more crying reform in the EPFO needed than with the employee funds.



May 3, 2016

Why should an employee be compelled to go for annuity ? The employee should have freedom to use the funds per his choice. Employee doe notneed a BIG BROTHER or BIG BOSS to decide .

Like (1)


May 2, 2016

The article is a lame excuse to support govt. no rules can ever be applicable retrospectively. Even in criminal law it is not valid. If the govt wishes to manage funds differently, it can bring in different scheme and if found attractive, the people will subscribe to it.

If the author thinks Rs50 loss of interest as insignificant, why does the govt want to steal such an "insignificant " amount from honest tax payers?

The results of all future elections will be in response to the finance ministry's activities. As per the records to date, it seems to be downhill course for B JP.

Like (1)


May 2, 2016

Well, I am novice in this subject, but i would like to know - after i pay my taxes, i have every right to use my money the way i want. Why should the govt say, when i should withdraw my money.

If the govt wants to dictate, it should not make it mandatory to contribute to EFP.
I am better off, not availing the tax deductions on this EPF contributed amount and invest in such a way so as to secure my and my family future..

Govt cannot manage its finances and it is advising people about securing future..what an irony !!!!!

Like (1)


May 2, 2016

Hi Vivek,

Personally I feel, government should not make EPF mandatory at least for employees beyond a Salary value ( e.g. say 5 lac per annum ). If Govt makes it mandatory, then it should not block the money.

The idea behind having EPF is to ensure people save for their retirement, but it is more relevant up to a certain salary.

If given a choice, I will opt out from the EPF scheme. I will get my portion and employer's portion in my monthly salary only. If I still wish, I will invest in PPF. Because PPF is more transparent, and the withdrawals are also much simpler as compared to EPF.

Rather I am completely against Government telling me what to do with my Money or Life

Warm Regards

Like (1)

Vishwanath Sastry

May 2, 2016

Dear Vivek,
The EPF corpus left as is itself is not a sufficient funding to fund a lot of our needs. The concept of inflation is just to FOOL people. Who will agree that inflation rate is just above 5% in India? Go to enroll your kids to school, the school fees increase at a annual rate of 10-15%. Cost of engineering courses are increasing at the rate of 20% per annum. The cost for medical education is already out of reach of common man. Nobody will accept that price of medicines has inflation of just 5%. These are basic necessities of people and it is with this goal that people save and want a big corpus during retirement. It is upto them whether they would want to utilize their funds for their kid's education or medical emergencies etc. Who is the government to prevent that through taxes?

If government wants more funds for its agenda, they should focus on getting black money parked by politicians and business men rather than targeting the common man. We do no have any social security scheme in India, so what right do they have to tax withdrawals on our retirement corpus. We do not need lessons on money management from government.

Like (1)

om prakash goyal

May 2, 2016

The problem is that all experts on economics and finance consider that if there is increase in giving benefits through incentives/interest rate cut/ loan write off/ subsidies to Industries or trades, it is called a reform and also if there is rate cut of interest or higher taxation on common man, it is called a reform.
This contradictory approach of the government/experts is the root cause of distrust in government by the common man. Government's job is not to promote industrialsits/traders only but to look after the interest of common man.

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