The Employee Provident Fund (EPF) is undergoing many changes. So will the changes enhance the utility of EPF or handicap subscribers?
About Employees’ Provident Fund and Employees’ Pension Scheme:
- EPF (Employees’ Provident Fund Scheme 1952) and EPS (Employees’ Pension Scheme 1995) are two different retirement saving schemes under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, that are meant for salaried employees.
- Employees are automatically enrolled into the EPS scheme only if they are members of the EPF scheme.
What is Employees’ Provident Fund?
- The Employees’ Provident Fund (EPF) is a savings tool for the workforce.
- It is a scheme managed under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, by the Employees’ Provident Fund Organisation (EPFO), Ministry of Labour & Employment, Government of India.
- Under the EPF scheme, an employee has to pay a certain percentage from his pay and an equal amount is contributed by the employer.
- The employee gets a lump sum amount (which includes his own and employer’s contributions) with interest upon retirement or two months after switching jobs.
What is Employees’ Pension Scheme?
- An employee contributes 12 per cent of his basic salary directly towards EPF.
- The employee does not contribute directly towards EPS.
- Of the employer’s share of 12 per cent, 8.33 per cent is diverted towards the EPS, with a cap of Rs 1,250 (earlier Rs 541) a month.
- When the employee switches jobs, the EPF gets transferred to the new employer, but not the EPS.
- When the employee switches jobs, the EPS contributions stay with the EPFO.
- The employee has the option to either withdraw the EPS amount or carry it forward to the next job.
Highlights of changes and its implication
Curbs on withdrawal:
- Earlier: A few years ago, the Employees’ Provident Fund Organisation (EPFO) had ruled that partial early withdrawal would only be permitted on occasions like a child’s marriage, higher education, making a downpayment for a house etc.
- Now: The EPFO has now ruled that members can withdraw 75% of the corpus after a month of termination of service, and after two months they can withdraw the remaining 25% and go for final settlement.
- Implication: Financial planners say restrictions on withdrawals will ensure that retirement is not compromised.
Hike in equity exposure:
- Earlier: The EPF generated returns entirely from investments in fixed income instruments. Three years ago, the EPF entered the stock market, deploying a nominal 5% of the incremental corpus in equity exchange traded funds (ETF). Equity exposure has since been hiked to 15% of the incremental corpus.
- Now: In future, subscribers may be given the option to deploy a higher portion of their EPF contributions into equities.
- Implication: The option to hike equity allocation can help in retirement as it will help subscribers fetch a higher return on their corpus. However, some experts feel increasing exposure to equities is not a good idea as the volatility in equity returns will lead to fluctuations in yearly returns from the EPF.
Unitisation of Provident Fund balance:
- Changes: With changes in the accounting policy for the portion of EPF invested in equities, the corpus parked in ETF will soon be credited to subscribers’ accounts in the form of units. These units can be redeemed when the subscriber exits the fund.
- Meanwhile, earnings on the debt portion will continue to be paid as interest. Accordingly, each subscriber will have two account heads under EPF—fixed income and equity.
- Once the unitisation of PF balance is implemented, the value of every subscriber’s equity holdings will be marked to market. Additionally, the subscriber would get the option to defer withdrawal of the equity investment for up to three years.
- Some financial planners say unitisation will usher in greater transparency. However, others say this will shift the onus of risk onto subscribers. Besides, regular visibility of the performance of the equity portion may push subscribers into making hasty decisions.
Changes to Employee Pension Scheme:
- The Employee Pension Scheme, which runs parallel to the EPF, is also likely to see some changes.
- At present, employees earning up to ₹15,000 a month are eligible for a minimum guaranteed pension of ₹1,000 per month after retirement. All members become eligible for pension after 10 years of contribution to EPS.
- While employees contribute 12% of the basic pay to EPF, the employer has to make a matching contribution, divided into two parts: 8.33% of the basic pay is directed towards EPS—subject to a cap of ₹15,000—and the remaining 3.67% is parked in EPF.
- Proposed changes: The labour ministry may enhance the wage ceiling from ₹15,000 to ₹21,000. The retirement body is also considering doubling the minimum monthly pension for EPS subscribers to ₹2,000.
Higher pay, more contribution:
- The EPF may also be indirectly impacted by possible tweaks in the structuring of employee’s salary.
- According to reports, the government wants to cap allowances to employees at 50% of the basic pay. If basic income is raised, it would result in higher contribution towards EPF, apart from other social security schemes.
Dealing with a revamped EPF:
- The EPFO has tried to simplify the subscriber’s interaction with the retirement body by offering services online. The introduction of the Universal Account Number or UAN is set to reduce complications during withdrawals and linking multiple PF balances.
- With its tax benefits, the EPF has an advantage over other savings vehicles. Apart from the income tax deduction allowed on employer’s contribution to the EPF, the interest income is tax free. The interest rate, at 8.55%, continues to be several notches higher than comparable government instruments.
- Subscribers can count on the EPF to offer competitive interest rates in the future. However, the introduction and hike in equity exposure along with the planned unitisation of the equity component pose some risks.