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Why are People So Touchy About EPF

May 2, 2016

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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 The protests continued and the proposal to tax EPF was then withdrawn.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"

jayant Gharpure

May 2, 2016

The decisions of Govt. Puts it in bad light as far as goverenance is concerned. Not expected from Modi Govt. To overturn it's decision so fast. Where has that Stern Ness has gone which was seen when it stuck with FTTI.& GOLD excise duty

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Avjit

May 2, 2016

Loss aversion certainly kicks in but is only one factor. Don't you think that another major factor for the protests was 'distrust in policy makers'. I think everyone saw it as a sinister Step 1 to a larger loot of their savings. Why else would a policy maker tweak a perfectly functional system? Any correlation with what the jewellers were up against!

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Suresh Rao

May 2, 2016

Veivek, I always enjoyed reading your dairy/blog. You always seem to have data as the basis for your analysis and logically well structured.

However on EPF, you seem to have lost it! I have 3 simple questions and if you can give direct and simple answers to those, the issue will become clearer.

1. Annuity market in India is very immature at best or fraud at its worst. That being the case why the govt is forcing some one to take Annuity?

2. The rules are applicable only to Private employee. Does a private employee has an option to withdraw from EPF?

3. What is so sacrosanct about 58 years? Why not 40 years? or 50 years? Remember, we are talking of private sector employees. Many of them are in a position to retire from work by 50 years of age! Or some may be forced to retire earlier than 58 years. Why they have to wait till 58 years to get the monies?

When you try to answer these, it becomes clear that it is Govt's scheme of extracting some money under the noble disguise of "pension Society".

regds/suresh rao

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Sam

May 2, 2016

Hi

I am regular follower of your articles for the past one year.

I think, you are analysing EPF issue as any other issue which is related to government subsidy, which now a days are being talked as a crime subject (and every economist feel & orate subsidy are to be stopped to economically weaker section of people; for India to achieve growth ). The irony is, none of the so-called economist or the financial observers have raised any voice, against the loss suffered by Indian government / tax payers due to Lakhs of crore rupees being written off in the name of Bank NPAs and the obvious beneficiaries are corporates. Except RBI Governor, everyone opted to keep silent in this issue.

You will not deny, the fundamental function of any government is to work for the welfare of all section of people and not profit motive. It is for the crony capitalists, profit motive comes as priority and for them, welfare for anybody other can capitalist is a waste of money. Now-a-days, most of the economists preach; government should fall in-line with crony capitalists motive.

Hope, you will agree EPF fund is a sensitive subject and any policy, which changes the dynamics of it should be handled with care. I find, the present government is handling it in the most insensitive way.

Bye

Sam

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Girish Patkar

May 2, 2016

I am afraid about the mass hysteria getting built up thru nonsense debates on 24/7 news channel every day without complete knowledge or without understanding the rationale of the issue /policy being discussed.

I think the media needs to study all issues in depth or get experts to do it for them before taking it to the public, else they will be doing a grave disservice to the nation.

Girish



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Miss Yvonne Furtado

May 2, 2016

Attacking the Provident Fund is the sole baby of the Finance Minister/BJP Govt. which for the most part have carried forward more efficiently/inefficiently the UPA financial reforms agenda. The minority fixed income salary class is a soft target and a sure source for dumping the tax burden of the entire Country. The BJP policy is to destroy the security of the salary class twilight years. What happened to their promise of bringing back the Black Money? We need a more intelligent Finance Minister who will be able to change the law to get a larger percentage of Indians namely the small business traders and non salary earners to pay their taxes.

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Prasad

May 2, 2016

EPF money is retirement money. After a person retires, he has full authority to decide about what to do with his retirement money. Nothing should be forced on him. At the same time, govt can educate all people about the benefits of investing in NPS or similar investments such that people voluntarily invest their EPF money in such schemes.

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Venkata Ramanaiah N

May 2, 2016

Vivek,

I am a regular follower of your articles and enjoy your writings and views but not this one on EPF. Once of your earlier article was also favoring EPF withdrawal limits. While I am not denying the fact that the limitations will benefit many, the same is not true for each and every EPF member and that is why the limitations are not good.

Also, since you write on finance, I know you understand better than me what retrospective rules means. So, let me ask you one direct question, though harsh (sorry for being that way), you have invested in some long term product (15-25 years long which permits liquidity before maturity) having understood it's specifications with maturity period in mind as 20 years and later after 15 years of your investment, the product manager came to you and said my earlier specifications are being changed retrospectively and you will not be allowed to liquidate your investment till the product maturity period of 25 years so that your investment will have returns of another 5 years fetching you a bigger corpus. Now you will be happy to agree and not protest against that change and forgo your earlier investment horizon of 20 yours and your planned financial goals?

The same is happening with EPF. Period.

BTW, may be it is better if you could educate us and provide your views on the following situations of an EPF member in the context of the now rolled back EPF withdrawal limits.

Assuming the EPF member managed his/her finances badly like our Indian Governments or earn very low and hence did not really have much money to fall on other than EPF, has landed into one of the following situations
- In this age of insecure private jobs, lose his/her job at the age of 45-50 years and do not find a new job?
- He/she does not want to or cannot work anymore after 45-50 years or leave the country?
- He/she wants to quit the job to do something on his/her own at some point in career?

Thanks,
Venkat

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Vipul Jasani

May 2, 2016

Modi Govt. has now more threat from finance ministry than opposition. Finance Ministry is enough to defeat BJP in next all elections.

It is clearly pro rich Govt by eyeing on poor, already retired and middle class people's money like EPF, PPF, small savings interest rates etc.

Except Govt., everyone knows that even after having tax free amount, the amount accumulated in EPF is not enough to take care higher cost of living due to inflation and moreover the lower interest rates make their life miserable when they live only on retirment corpus!!

Thanks,

Like (2)
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