India’s Provident Fund Scheme to see Significant Change in 2015

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Rupee notesBy Tarun Manik and Samuel Wrest

Indian citizens working in India’s organized sector are entitled to coverage in the country’s social insurance program, called the Provident Fund Scheme (PFS). International workers, including expatriates working for an employer in India, are also eligible to participate, but only a small portion of India’s working population currently contribute to the scheme.

The PFS is widely viewed as an imperfect social insurance program and was accordingly amended several times in 2014, particularly following the election of Prime Minister Narendra Modi and his BJP party in May. According to local media in India, further changes to the PFS have now been proposed and are in the pipeline to be implemented this year.

Proposed Changes for 2015

No. of Employees

Presently, it is compulsory for a company to register with the PFS if it has more than 20 employees. Should the new proposals go through, this number will be reduced to 10, meaning that more companies will be eligible to participate in the scheme. The change will mainly impact smaller businesses, especially those which have recently set up in India or are subsidiaries of foreign companies.

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Employees’ Portion

Employees and employers both currently have to contribute an equal share of 12 percent into the PFS. The new proposals offer increased flexibility to employees and allow them to choose how much they pay into the scheme. Therefore, if an employee feels they are unable to contribute the full 12 percent, they are able to instead contribute an amount of their choosing. Employers, however, shall continue to pay the full 12 percent.

Changes to systematic numbering

The new BJP government has already shown it is quite capable of implementing new policies quickly, and recent changes indicate that the government is indeed moving towards fundamentally changing the current PFS program.

Just a few months ago, a new systematic numbering method, called the Universal Account Number (UAN), was proposed for implementation. Under the previous system, if a person were to quit one company to join another, the necessary forms would have to be manually transferred from his or her old account to a new one. The system proved to be inefficient, with people regularly opening new Provident Fund accounts every time they found new employment.

The new UAN system is now being implemented. It provides a unique number to an employee, which is then used as his or her permanent number irrespective of any change in employment – even if that person is employed in a different state. This means that their account in the Provident Fund department will also remain the same.

Overall, India’s Provident Fund Scheme is improving. The new UAN system will make the program far more effective, and by planning to reduce the number of mandatory employees, the government has taken a step towards ensuring that persons employed by smaller companies will also receive benefits.  This in turn promotes entrepreneurship and will encourage people to take up positions in smaller companies.

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