Friday, March 4, 2016

Recent Changes to EPF Regulations In India

The Employee Provident Fund or EPF is probably the most popular retirement savings option for the Indian Middle Class. In fact, for most of them EPF is maybe the only savings they have for retirement. EPF has been a hot topic of discussion in this blog in the past many years and recently there have been a few changes to the EPF Regulations in India. The purpose of this article is to Review them.

Before We Begin: This article is not a politically motivated article. It purely highlights the changes and reflects my personal opinion reg. the same. Please share your thoughts in the comments section. 

Change No. 1: Hike in Retirement Age 

Previously 55 was considered the Retirement Age from an EPF Perspective where your corpus will be returned to you and you become eligible to receive pension from the Employee Pension Scheme (EPS). Recently the Government has hiked the age to 58 years.

My Views on the Change: Hiking Retirement Age by 3 years basically means the individual will continue to contribute to EPF for additional years and the entire corpus will continue to earn interest for the extended period. This will certainly be Good News for Individuals. 

Change No. 2: Changes to Withdrawal Rules - Before Retirement 

Withdrawing the EPF corpus when someone switches jobs is usual practice in our country. According to the Regulations an individual is eligible for a FULL Withdrawal Only if he/she is going to remain unemployed for a period of at least 3 months. Otherwise, the regulations stated that, one has to transfer their EPF corpus to the new Job. Nevertheless, this will probably be considered the most ignored rule and almost everyone does it when they switch jobs.

Recently the Government has come up with the following Ruling.

If an Individual Wishes to Withdraw from their EPF Corpus before retirement age, the amount will be limited to their Individual (Self) Contribution. Even this request can only be done after 2 months of cease of Employment. 
So, this basically means that the Employer Contribution and the corresponding Interest Component will be retained by EPFO until the retirement age of the individual and CANNOT be Withdrawn.

Of course, there is an exception to this rule - Female EPF members who are resigning from their job for Marriage or Childbirth they can withdraw the full corpus.

My Views on the Change: Many people may disagree with my opinion on this change but if you ask me, this option actually will benefit folks who switch jobs frequently and habitually withdraw the entire corpus and spend it every time. With this new ruling, at least the Employer contribution stays with the EPFO and will only be available at retirement age. So, this will be one kind of Forced Savings on behalf of the Employee. 

Update: The Government has recently announced that, this proposed limitation on withdrawal is scrapped. So, the EPF Acc holder can get his entire corpus without having to wait till retirement age. 

Change No. 3: Taxation at Retirement of EPF Withdrawal 

When someone retires and withdraws their EPF Corpus, the Government has proposed that only 40% of the corpus will be tax free in their hands. The Remaining 60% would be considered Taxable Income.

The point to note here is that if the individual is purchasing an "Annuity" product for the 60% corpus then, this amount wouldn't be considered Taxable Income. And, more importantly, when the lumpsum amount gets paid out to the legal heirs of the individual after his/her life, this amount is Tax Free for the next generation.

Update: The Government has recently announced that, this proposed taxation of EPF ruling has been dropped. So, there is no tax on withdrawal during Retirement

My Views on the Change: Many people may disagree with my opinion on this change but if you ask me, this again is a GOOD change. Most Individuals get their life savings in one bulk and eventually spend it on something or the other and end up with little or no money for their Retirement Years. By introducing this taxation aspect, many people will think about buying the Annuity Product instead of withdrawing in full. This Annuity will help ensure that a monthly pension gets paid out to the individual for the remaining duration of their life. Couple that with the fact that the corpus will be Tax Free in the hands of the individuals sons/daughters I would say this is a VERY GOOD change. 

Some Last Words:

There is a lot of hoopla going on in Social Media where people are bashing the Government for these changes. But, the sad truth is, most folks dont understand the change fully. They believe things like - The Entire Retirement Corpus is Taxable or You cannot Withdraw Ever from your EPF etc. As citizens of our country, you have Absolutely Every Right to disagree with any rule change however please get all your facts right before you voice your displeasure.

And, please do share this article with your friends so they can make an informed decision about the changes.

Hope you found this article useful.

A Couple of EPF Related Articles that you might find Useful:

Employee Provident Fund
All Your Questions about EPF - Answered


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