Should early PF withdrawals be penalised?

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Published: July 21, 2015 12:42:38 AM

It is true that the PF money belongs to the workers but to keep the scheme going, there has to be some penalty for early withdrawals

EPFO“For a working incentive-disincentive mechanism, there needs to be a penalty for premature withdrawal, and additional contribution to the corpus if withdrawal is made only on retirement.” (PTI)

For a working incentive-disincentive mechanism, there needs to be a penalty for premature withdrawal, and additional contribution to the corpus if withdrawal is made only on retirement, says Samirendra Chatterjee.

The Employees Provident Fund Act, 1952 was enacted to provide a savings fund for workers that they could access in times of needs and accumulate a corpus at retirement. It was never intended at that time, to be a pension fund, which would provide a monthly pension. The savings today consist of 12% wages of workers and a  contribution of 12% by employers, a total of 24% of wages per month.

In November 1995, 8.33% of employers’ 12% contribution was diverted into a pension fund, from which pension was given after 10 years of contribution, based on certain conditions. While the National Pension Scheme is individual pension fund accounts, the EPF pension scheme is based on “Defined Contribution and Defined Pension” with no connection whatsoever to the contributions made. In its present form, the EPS is a ponzi scheme, which sustains so long as more people contribute than withdraw (it is at 10:1 now). However, that is a different story.

There is a provision in the scheme that if a worker is unemployed for more than 60 days, he or she can withdraw the entire amount, including pension contribution. This provision is being misused by workers by withdrawing their entire savings. A check in one of the 120 regional offices in 2011 showed that the average time for which a worker accumulated the funds, was only 18 months. So EPF accounts are being used by workers like a savings bank account.
Note, EPF deduction is mandatory for employees earning upto R6,500 per month, recently increased to R15,000. At even this enhanced wage, even if the employers’ 12% contribution is added, the salary/wage will be below threshold level for income tax payment.

Of the 1 crore withdrawals from EPF accounts every year, only 2.5 lakh are on superannuation (there are about 45 lakh pensioners over last 20 years ), while 7.5 lakh could be by employees with high incomes. The higher paid employees belong to the 3,000 ‘exempted establishments’ which maintain their own accounts, control a corpus of over R2 lakh crore, have their own investments, and are out of the purview of EPF-controlled funds. So, about 90 lakh EPF members withdraw funds every  year, and do not come under the income tax net even if the employer contribution of 12% is added to their income.

If 30% of the dues are deducted as income tax, 90 lakh employees who have never filed tax returns would have to file returns to get back the amounts as refunds. The EPFO would have to file TDS returns for each of them, and subsequently, the income tax (I-T) department would have to give them refunds. It would lead to huge amount of paperwork, wastage of time for members, EPFO and the I-T department, without any addition to tax revenues. Since many workers in this income category would not be able to file tax returns, the I-T department may earn a few hundred crores, without it being actually due to the revenue department. Not a very appropriate way to earn revenue!

In any financial matter, the incentive-disincentive mechanism works best. This could be through a penalty for premature withdrawal, and additional contribution to the corpus if a worker withdraws only on retirement. To start with, if a worker withdraws his funds before 5 years, a 15% penalty of the entire fund withdrawn, including pension contribution,  could be made mandatory . This would amount to 30% of employers’ contribution. Those withdrawing between 5-10 years would forfeit 5% of total withdrawal, which would be a big penalty on this accumulation. A member withdrawing only on retirement may be given an additional 0.5% of his accumulation as incentive. The forfeited amount could be deposited in a ‘forfeiture account’ of the EPFO, to be used for the benefit of members, as decided by the board of trustees.

A quick calculation indicates that at present, this forfeiture would be R5,000 crore annually. As employees realise they are losing due to premature withdrawals, the forfeiture amount is likely to fall, meeting the objectives of the social security fund.

The author is former secretary, department of ex-servicemen, ministry of defence

It is all the money of the workers and not a single penny is contributed by the government. Hence, people should be allowed to withdraw the full amount as and when required, says DL Sachdeva.

The proposal of the Employees’ Provident Fund Organisation (EPFO) to put a cap of 75% on withdrawal of provident fund (PF) money by workers before reaching the retirement age of 58 is too restrictive. Earlier, workers were allowed to withdraw the entire amount upon resigning from a job or for use before retirement. Imposing a cap on withdrawals will need an amendment of the EPF scheme itself. While the government has gone ahead and made an announcement in this regard, the issue hasn’t been discussed within the Central Board of Trustees, the apex decision-making body of the EPFO.

This is being carried out by completely disregarding the trustees, who are the custodians of the workers’ money. The fact that the government notified this without any discussion with the former is improper and unlawful. Such a move cannot be decided upon unilaterally.

While the move to restrict PF withdrawals to 75% is primarily to boost the flow of social security benefits of workers after their retirement, many other issues need to be considered before taking such a decision. Let us consider a case where an individual who, after working for, say, 10 years in an organisation, wants to start his own business. While she could have earlier withdrawn the entire amount in her PF account, going by what has been proposed, she will be able to withdraw only 75% of the money. The remaining 25% is stuck with the EPFO, and will continue to remain there till such time as she reaches the retirement age. While that money resides in the EPFO accounts for well over 20 years, the individual will not earn any interest on the amount after three years. That’s totally improper and unjustified.

We do agree that there should be some measures to restrict haphazard withdrawal by workers. After all, this is the money that the worker needs when she has no other source of income. But there should be a means to ensure that they be allowed to withdraw the entire money in case say they are building a house or getting their child married off. Before approving such a withdrawal, there should be mechanisms to check whether the worker already has a plot of land or is empanelled as part of a housing society. Only then should the money be given. What needs to be opposed is the imposition of any cap on the amount that a worker can withdraw. It is for the worker to decide what amount she needs to withdraw.

The central trade unions plan to raise this issue at the highest levels. It will be raised with the labour minister during the meeting of the standing committee on labour. The prime minister addressed the 46th Session of the Indian Labour Congress on Monday. The trade unions plan to raise this issue at the highest level of government. Basically, what we are opposed to is the imposition of an arbitrary cap. The government, of course, can change the scheme, but it needs to be done after following the due course of law. Labour unions will support anything that helps workers, but the EPFO needs to ensure that in the process, the rights of workers are not violated.

All of the money belongs to the workers and not a farthing is contributed by the government, Hence, people should be allowed to withdraw the full amount as and when they require it, in the absence of which, the government should compensate with higher minimum wages. In case the government must make such a move, it has to be raised in Parliament and discussed. While this measure will be opposed, one must realise that the EPFO has introduced the Universal Account Number (UAN) programme, where the worker is given an account number that does not change even after changing jobs. While it helps employees keep track of their PF contributions, it is a very positive step.

The author is national secretary, All India Trade Union Congress

(As told to Anup Jayaram)

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