India’s Idle Provident Fund Accounts to Accrue Interest Following Government Notification
By Pritesh Samuel
India’s labor ministry passed a new regulation on November 11 allowing for inactive employee provident fund (EPF) accounts to accrue interest. As per the notification, EPF accounts that are inactive for 36 months or more will no longer be considered ‘inoperative’ and will continue to earn interest. As such, the EPF account will continue to have an active status irrespective of the employee’s termination, unless the employee withdraws the cash from the account or gets another job within two months with another employer. Moreover, the new regulation will allow for the transfer of an existing EPF account to one under the new employer. The interest payable is notified annually, and for 2015-2016, it was set at 8.8 percent.
Since April 2011, accounts that were inactive did not attract interest. If a person quit, was unable to get a new job, or failed to transfer his/her EPF account to a new employer, the funds in their account were not considered eligible for earning interest. After the new notification, EPF accounts will now be deemed inactive only upon the following conditions: the account holder’s retirement at 55 years, subsequently leaving the country, and not withdrawing from his/her EPF balance within 36 months. The developments bode well for millions of working Indians, especially for those who want to leave jobs for self-employment, start a new business, or work with smaller companies that do not subscribe to the EPF scheme.
The Employees Provident Fund Organization (EPFO) is one of the largest social security providers in the country. Between 2014-15, EPFO has received US$ 12 million (Rs 88,723 crore) from employer organizations, while accounts worth about US$ 3.9 million (Rs 27,000 crore) were lying inactive two years ago. In addition, several companies have their own private EPF trusts. Analysts say that about 3,000 trusts cater to around 50 million employees. The new regulation will thus mean an increased cost for employers running such EPF trusts, as they will need to provide interest to accounts earlier designated as inactive.
Typically, employers and employees contribute 12 percent per month towards EPF against the employee’s basic salary plus dearness allowance. From the employee’s share, 8.33 percent up to a cap of US$ 18 (Rs 1,250) goes toward the pension, and the rest is credited to the EPF account. However, for persons who have become EPF account holders on or after September 1, 2014, the entire contribution will be sent to the EPF account. While the EPF scheme is mandatory for a salary below US$ 220 (Rs 15,000), most employees are covered.
The changes to the EPF regulation come as the government is set to introduce key labor reforms. Further, the government wants to extend the social security scheme to all economic sectors, thereby expanding the EPFO network. Recently, new guidelines were issued with respect to the settlement of death claims within seven days and retirement cases before or on the day of retirement. Other new initiatives by the EPFO include answering social media queries as soon as possible and joining common service centers (information and communication technology access points under the e-Governance project) to facilitate the use of Jeevan Praman Patra – a Digital Life Certificate for Pensioners.
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