The Employee Provident Fund is one of the primary sources of post-retirement savings for private sector employees. In the absence of any pension scheme, this acts as the mainstay of a private employee after retirement. It has gone through a round of significant changes in 2018 and has transformed some of the basic structures of this scheme.
What is Employees’ Provident Fund?
Commonly termed as EPF, it was devised under the Employee’s Provident Funds and Miscellaneous Provisions Act of 1952. It falls under the Employees’ Provident Fund Organisation’s (EPFO) purview and covers every establishment with more than 20 employees. In exceptional cases, companies with lesser than 20 employees may come under this scheme. Data released by EPFO has revealed that 1.2 Crore new accounts were added in the first 11 months of 2018. This government organisation currently controls a corpus of Rs. 10.5 Trillion.
Under the Employee Provident Fund scheme, a worker contributes a certain percentage of his salary to a pool where his employer adds an equal amount. At the end of that employee’s career, he can withdraw this amount in 1 or more installments with all the accumulated interests.
As it stands now, every employee with a monthly salary of less than Rs. 15,000 has to be a part of the EPF India network mandatorily. People who earn more than that amount are considered ineligible for this scheme, although exceptions can be made with the approval of APF Commissioner and their employer.
New Changes to the Scheme
While the EPFO updates rules of this scheme frequently, it largely depends on the economic, employment and legislative scenario of that particular time. Therefore, it is imperative for a private employee to know everything about Employees’ Provident Fund and the changes it undergoes.
As mentioned, the authority announced the most recent changes in 2018, which will impact some of the critical elements of this scheme.
- Withdrawal Span and Limit
Earlier, employees could withdraw the entire amount after being unemployed for 2 months. The account would be considered settled once an individual withdraws it. However, the account could be broken only upon retirement or special occasions like a ward’s marriage, repayment of home loans, payment for a ward’s higher education, etc.
The new rules state that an employee can now withdraw 75% of his savings after his first month of unemployment with an option to withdraw the remaining 25% at the end of the next month. He can either settle his account altogether or keep it operational with a nominal amount if he so wishes.
It was done to allow a certain degree of flexibility on withdrawal from the Employee Provident Fund corpus without making any compromises on retirement safety.
- Equity Exposure
Traditionally, an Employee’s Provident Fund Scheme would be invested entirely in fixed income instruments; government and corporate bonds, in particular. However, now, a nominal percentage of an employee’s corpus is deployed in ETF funds (Equity Exchange Traded funds). Currently, this percentage stands at 15%.
This upgrade can potentially deliver higher returns as equities generally yield healthier revenues. However, an employee can increase or decrease this percentage according to his preference. Younger employees, in particular, are more likely to increase this percentage as they have a long time horizon.
Consequently, an employee’s PF account will be divided into 2 sections – equity and fixed income. The amount in one’s equity section will not be factored in the calculation of interest. It will be deposited to their account in units, redeemable when they break their corpus.
EPFO has already invested over Rs. 47,000 Crore in equities. It has resulted in a 16.07% ROI.
With these new changes, the Employees Provident Fund is set to become more flexible and potentially offer a higher amount due to equity investments. While the basic structure of this scheme remains unaltered, these changes are a massive step forward in retirement security for privately employed individuals.
However, Employees’ Provident Fund is a post-retirement scheme like senior citizen investment scheme which does not cover any immediate financial requirement such as medical emergencies. For such instances, one can avail personal loans from NBFCs. Despite this minor blip, the Employee Provident Fund covers the post-retirement financial requirements of its over 37 million subscribers. Without it, private sector employees wouldn’t have a centralised savings scheme with so many benefits.