Employee Provident Fund Saga

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Darshit Shah, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

The government has decided to withdraw its notification restricting the complete withdrawal of Provident Fund. Labour Minister Bandaru Dattatreya said the old system will continue.

Earlier during Union Budget 2016-17, FM Arun Jaitely had announced few amendments in the EPF Scheme 1952, thus tightening the norms on withdrawal from EFP. As per the old rule, an EPF member could withdraw full balance (employee’s contributions + employer’s contributions + interest amounts, if he is unemployed for more than 60 days. However as per the new rules, the EPF member could not withdraw full balance until the age of retirement. He could withdraw the amount aggregating the employee’s contribution and the interest amount.

On the similar grounds, the age limit for retirement had been raised to 58. Also, the option of full EPF withdrawal on resignation was not allowed. To further aggravate the issue 60% of the withdrawal amount would be taxed as per the applicable Income Tax slab. This tax was to be applicable for the corpus created out of contributions made after 1st April 2016. However, if the EPF member invests this 60% balance in an Annuity life insurance product, then he will be exempted from tax.

Although the new rules of EPF provided social security, especially to those employed in the private sector, yet there are some negative aspects of the rules which could not be overlooked. A person may not be able to use the EPF corpus for his business, even if the business may seem more rewarding. Also, the corpus would be stuck into retirement saving even if investing it into mutual funds may offer higher returns. Thus, the person is robbed of the right to invest his hard earned money at his own liberty. And on not reinvesting the money in annuity life insurance, is forced to pay tax on his money saved for retirement plans.

With all these negative aspects, there had to be severe criticism to the new rules which led to the scrapping of the new laws by Government. To provide the people with social security, instead of taxing the EPF, the government could come up with a mandatory Annuity Life insurance plan or something similar.


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