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All you want to know about EPF

A N Shanbhag | August 21, 2004 13:48 IST

Generally, government employees are provided with protection during their old age by way of pension.

The Employees Provident Fund and Miscellaneous Provisions Act, 1952 provides coverage to non-government employees working in establishments with 20 or more workers engaged in around 180 industries or business segments.

The cover is also available to workers in co-operative societies, employing 50 or more workers. The Employees Provident Fund Organisation is the apex statutory body which regulates and oversees compliance by all related entities.

Employees contribute 12 per cent of their salary every month with a matching contribution from the respective employers. There are three schemes -- the Employees Provident Fund, the Employees Pension Scheme and the Employees Deposit Linked Insurance Scheme.

EPS gets 8.33 per cent of the employer's contribution and the balance goes to EPF. Over and above this, the government contributes an additional 1.16 per cent, subject to a ceiling of Rs. 6,500 per month to the EPS from its own coffers.

The EPF offers a lump sum retirement corpus built out of monthly contributions and the accumulated earnings. The EPS provides a modest pension. The EDLIS offers insurance cover.

Employees are free to contribute more than the statutory minimum. Companies or establishments can choose to let the EPFO operate these schemes or to have their own trusts for managing it.

The contributions, earnings and accumulation of all subscribers to the EPF are tax-free and the employer also gets a tax benefit to the extent of his contribution.

Investment norms

In 1975, the government launched the Special Deposit Scheme managed by scheduled banks for achieving better returns by PFs.

Naturally, in due course, over 80 per cent of the investible funds of PFs were parked in the SDS and the amount kept on burgeoning.

This was a little embarrassing for the government. From 1998-99 onwards the government stopped accepting any fresh deposits. Only the interest on the corpus could be reinvested.

Gradually, there was more liberalisation to include investment in state government bonds and in 1993, the investment pattern was changed to allow PF money to be put in PSU bonds.

The central board of trustees of the EPFO is a tripartite body representing government, employers and employees. It determines the annual rate of interest based on the returns from its investments spread across the SDS, bonds of the central and state governments and PSUs, besides corporate debt.

In the past, the EPF's return was high due to the administered rates on the SDS. The government continued to keep the SDS interest rates way above its own borrowing costs for the benefit of EPF subscribers.

When the interest rates started to decline on the bonds issued by the Central and state governments as well as those by the PSUs the overall earnings of the provident funds have been pulled down considerably but not on SDS.

Then last year the government reduced the interest rate on SDS to 8 per cent, in spite of the fact that it borrows at less than 6 per cent on its bonds of various tenures, specially that of the 10-years tenure, which is used as the benchmark.

Yet, the EPF chose to declare a high rate of 9.5 per cent, which included a golden jubilee bonus of 0.5 per cent by partly dipping into its reserves.

Though it desired to hold the rate at 9.5 per cent, for obvious reasons, the finance ministry refused to endorse this rate and finally succeeded in pegging it at 8.5 per cent thanks to the strong stance taken by Prime Minister Manmohan Singh.

Although the EPF is meant to be a retirement plan, in reality, it has not achieved this purpose due to the fact that withdrawals under the scheme are allowed liberally and the investment restrictions which are biased in favour of risk-free instruments also hinder maximisation of benefits for members.

Government employees

As observed right in the beginning, government employees are protected by a pension scheme. This scheme is a bit convoluted. It is a defined benefit pension scheme which does not entail contribution by the employee.

This results in retiring persons getting same or similar benefit irrespective of their service tenure. In most cases, this proves to be a disproportionate cost especially in these days where the public sector employees are offered VRS.

Therefore, the present defined-benefit scheme is substituted by defined-contribution pension for persons entering the services of the Central government (excluding defence forces in the initial stage) on or after January 1, 2004.

They are mandatorily required to contribute 10 per cent of the salary and the dearness allowance every month. A matching tax-free contribution will be made by the government to this account.

While exiting at the age of 60 years or above, the individual would have to mandatorily invest 40 per cent of the pension money to purchase an annuity from an IRDA-regulated life insurance company.

There are three schemes having different asset allocations.

Individuals would be free to allocate their monies across any of these choices.

All the existing network of bank branches and post offices will be used to collect contributions and interact with the participants. The new system will also have a central record keeping and accounting infrastructure.

Accretions to such accounts, shall be taxed as the income of the year in which it is received by the assessee or his nominee on closure of the account or his opting out of the account or on receipt of pension from the annuity plan. No rebate will be allowed u/s 88 on the amounts on which deduction has already been claimed u/s 88CCD.

This is what is envisaged in the Budget and hopefully the provisions will get through.

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