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.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Doing Business in India 2016 is designed to introduce the fundamentals of investing in India. As such, this comprehensive guide is ideal not only for businesses looking to enter the Indian market, but also for companies who already have a presence here and want to stay up-to-date with the most recent and relevant policy changes.
Pre-Investment Due Diligence in India
In this issue of India Briefing Magazine, we examine issues related to pre-investment due diligence in India. We highlight the different regulatory, tax, and socio-economic issues that a company should be aware of before entering the Indian market. We also detail some of the topics related to entry structures while investing in the Indian market, as well as cultural and HR due diligence, which may differ from state to state.
Strategies for Repatriating Funds from India
In this issue of India Briefing Magazine, we look at issues related to repatriating funds from India. We highlight the unique regulations for sending funds back from India, examine the various strategies companies can make use of while repatriating, and look at remittance procedures for different types of Indian entities. Finally, we give some tips on how expats can remit their Indian money to their home countries.