Provident fund is one of the oldest social security schemes run by the Centre. A line in the monthly salary slip must be the second time you encountered the Employees’ Provident Fund (EPF). The first time usually is when you negotiate your pay package, when the employer adds a line which pushes up your gross pay per month.
Nearly six crore people are members of the Employees’ Provident Fund Organisation’s (EPFO) provident fund scheme.
While there are various retirement savings options available, including the Public Provident Fund (PPF), the National Pension Scheme and retirement mutual funds, EPF has been the mainstay of the Centre’s social security initiatives. Using the digital route to service the subscribers has greatly improved the user experience in EPFO over the past few years (see The digital route subhead).
In an effort to improve the scheme, the Centre has been tweaking the rules constantly over the years. It is now proposing to change the EPFO rules through an amendment to the original law.
Definition of wages
The manner in which wages are defined is key to calculating the provident fund benefit. Earlier, the PF contribution was calculated only on basic wages, dearness allowance (DA) and retaining allowance. Following the Supreme Court’s ruling in February 2019, basic wage was expanded to include all non-variable allowances. The proposed amendment to the EPF Act is partly influenced by the Supreme Court’s ruling.
The Centre is proposing to change the definition of wages to all remuneration, which includes basic wage, DA and retaining allowance, if any, for calculating the PF contribution. However, there is an exhaustive list of allowances that are excluded, including conveyance allowance, overtime allowance, house rent allowance (HRA) and bonus.
There is, however, a caveat. If the allowances excluded exceed 50 per cent of the monthly remuneration or any other specified percentage notified by the Centre, the excess amount will be added to the wages for calculating the provident fund contribution. In essence, if the proposed amendment goes through, employers will have to make sure that allowances form less than 50 per cent of the total amount they pay an employee. Else, they may have to pay a higher provident fund contribution.
The Employees’ Provident Fund & Miscellaneous Provisions (Amendment) Bill, 2019 is also trying to align the definition of wages under the EPF Act with that under the Code on Wages passed in August 2019. Once this is done, the definition of wages will be uniform across labour welfare-related laws.
Takeaway: Redefining wages for the PF contribution can result in higher monthly PF contributions, which can reduce your monthly take-home. But this is good for your long-term retirement savings. Also, since the employer has to match your contribution up to a limit, this, too, adds to your nest egg.
Transfer from EPS to NPS
Another proposed amendment in the EPF Bill relates to transferring one’s corpus from the EPFO’s pension scheme — EPS (Employees’ Pension Scheme) — to the National Pension Scheme (NPS). Under the EPF scheme, a part of the employer’s contribution goes into EPS.
The Bill proposes to allow existing EPF members to transfer their balance in EPS to NPS. This proposal was originally mooted in the 2015-16 Budget. It also finds a place in the draft Code on Social Security, 2019. The specifics of how this proposal will be implemented will only be clear when the Amendment Bill is passed and the rules for transfer from EPS to NPS are notified.
Takeaway: Since the monthly pension paid with the EPS balance is quite small and the returns earned through this corpus is non-transparent, investors with a greater risk-taking ability can consider shifting their EPS balance to the NPS, if the amendment is passed. Since NPS gives market-linked returns, the sum available at the time of retirement can be higher.
The Bill also proposes flexibility in allowing investors to experiment with NPS returns and go back to the EPS fold in case they aren’t impressed. This could help more investors make the shift.
Another proposal in the EPF Amendment Bill is to allow varying rates of provident fund contribution which maybe lesser than the current 12 per cent, for specific classes of employees for a certain period. This also stems from the 2015-16 Budget announcement. However, this proposal will not lead to a lower employer’s provident fund contribution. The contribution will be lower only for certain classes of employees.
Takeaway: Low-income earners may be happy with higher take-home pays due to the reduced contributions.
There have been some other changes in the past five years that have made the EPF more broad-based. In 2014, the threshold for compulsory enrolment into EPF was raised to ₹15,000 (basic + DA) from ₹6,500. This has brought more people into the EPF.
At the same time, new employees who joined after this change was introduced (in September 2014) were excluded from EPFO’s pension scheme (funded partly from the employer’s PF contribution) if their basic and DA combined was above ₹15,000.
For those employees who joined after September 2014, the whole of employer contribution goes towards the provident fund. This matter is currently under litigation.
EPF vs other retirement solutions
Apart from the mandatory nature of the EPF for establishments having over 20 employees, what has made the EPF popular is its income tax treatment. If withdrawn after five continuous years of service, the entire amount lying in the PF account of an individual is exempt from tax on withdrawal. Also, below a threshold (9.5 per cent a year ), the interest accrual on provident fund contributions is also exempt.
Partial withdrawal of provident fund balance is allowed for buying and renovating a house, higher education of children, marriage of self, siblings and children, and medical treatment of family, among other purposes.
For NPS, there are certain conditions and purposes for which premature withdrawal is allowed. First, you should have been an NPS subscriber for at least three years. You can withdraw up to 25 per cent of the total NPS contribution. This amount is tax-free. Such withdrawals are permitted only thrice till the age of 60 years.
If you are unemployed for over a month, up to 75 per cent of the balance in your EPF account can be withdrawn, and the rest of the amount can be withdrawn after the second month. Income tax will be deducted at source at 10 per cent for withdrawals above ₹ 50,000 before completion of five years if you submit your PAN. In such cases, the earlier deductions claimed and the interest earned also become taxable.
Compared with NPS, EPF seems to have more benefits. One, on retirement, only 60 per cent of the NPS corpus is exempt from income tax. The balance 40 per cent has to be invested in an annuity, and the income from annuity is taxable. Although the Centre has tried to bridge the gap by bringing NPS closer to EPF in terms of taxation, there is an arbitrage in EPF vis-à-vis NPS.
Other options for retirement planning are PPF and equity mutual funds. PPF invests predominantly in debt instruments, and gives lower returns.
You can contribute up to ₹1.5 lakh a year. Partial withdrawals under PPF are permitted after six years for certain purposes, or fully after 15 years. PPF withdrawals are fully exempt from tax.
Equity mutual funds — whether normal or with the retirement planning label — in the long run, can give superior returns. Income from sale of units of a equity mutual fund held for over 12 months is subject to long-term capital gains (LTCG) tax. For individuals, this tax is applicable to LTCG above ₹1 lakh at 10 per cent without any indexation benefit.
The guaranteed return on the contributions makes EPF a more attractive retirement planning tool. For 2018-19, this rate is 8.65 per cent. Employees can also contribute a higher amount than the 12 per cent that is mandatorily required and still get the benefit of tax deduction under Section 80C of the Income Tax Act.
Although the EPF doesn’t provide superior returns compared with mutual funds, the certainty of return, backed by an implicit sovereign guarantee makes it a preferred option for many savers.
The digital route
A host of services are available online for EPF members, making procedures much simpler and reducing delays.
Online viewing and updation
Many of us see our EPF contribution being deducted from our salary every month. Ever wondered how much you have exactly contributed till date, what is the accumulated interest, and the total balance in your EPF account? While in the not-so-distant past, this information was not available instantly, today, you have access to this at the click of a mouse, through the Member e-SEWA portal ( https://unifiedportal-mem.epfindia.gov.in/memberinterface/ ).
This portal can be accessed by logging in with your UAN (Universal Account Number) and a password, after you activate your UAN on the same portal. Once you enter the portal, you can pull out your passbook from the ‘View’ tab to check your balance. Your personal details and UAN card can also be viewed under this tab.
Do you have several EPF accounts? You are not alone. Thanks to the e-SEWA portal, you can now view all your accounts in one place — your UAN will act as an umbrella, bringing all your accounts under one roof. You can also transfer your old accounts into the new account, with the cognizance of the current or the former employer.
The portal allows members to update their mobile numbers, email ids, KYC information and bank account details (which will be verified by the employer) as well as nominate beneficiaries or change the nominees at any point in time.
To know your EPF balance alone, you can also send an SMS to 77382 99899 or give a missed call to 011 2290 1406.
Online claims and transfers
Apart from viewing and updation, you can also make claims and withdrawals by filling out the relevant forms available on the portal. Death claims by the beneficiary can also be made online.
Once you have submitted a claim, you can also track its status online. The updates to KYC, bank accounts, etc, will come in handy during claims or transfers. Two to three years ago, the EPFO overhauled the forms to be filled for making claims/withdrawals.
Prior to that, you had to fill Form 19 for complete withdrawal; Form 10C to retain membership of the pension scheme or to claim withdrawal; and Form 31 for partial withdrawals. Rolling all these into one, a composite claim form was introduced.
While these moves certainly make claims and transfers easier, a few grey areas remain. Originally, only members whose Aadhaar details had been authenticated and seeded against the UAN could submit their withdrawal, settlement and transfer claims online. Similarly, the composite claim form originally allowed members to approach the EPFO directly by-passing employer attestation, if Aadhaar and bank account details were linked to the UAN.
Considering the Supreme Court judgement on making Aadhaar non-mandatory for a host of services, opinion is divided on whether the above-mentioned rules are still applicable.
Thus, it is not clear if new members who have joined after the judgement or those who have not seeded their Aadhaar will be allowed to make claim or transfer requests online and by-pass employer attestation. However, for members who have already seeded their Aadhaar with the UAN, these services will be available online.
Other investor-friendly services
A new pensioner’s portal has been created (https://mis.epfindia.gov.in/PensionPaymentEnquiry/) for tracking pension status or making payment enquiry.
Further, to settle any grievances that you may have, the EPFO also operates an online grievance management service at epfigms.gov.in/. You can register your grievance, upload supporting documents and track the status here. EPFO services are now also available on UMANG (Unified Mobile App for New-age Governance). The app can be downloaded by giving a missed call to 9718397183 or from the UMANG website or app stores.