Difficult Times for EPFO account holder

Can you possibly imagine how would an EPFO investor be feeling today?

His hard earned money being parked with and managed by an organization which

• Still has archaic accounting system
• Poor Management of funds  
• Allows withdrawals in contraventions of law.
• In all likelihood, the EPFO is running a deficit!

 According to an article in The Economic Times of 8^th. April, 2011, Income Tax department has slapped a demand notice on EPFO to the tune of whopping Rs. 7,000 crores. The said demand has been made due to the inability of the EPFO to prevent pre-mature withdrawals which are not allowed under the Indian Income Tax Act, 1956. The liability could have been more had the EPFO maintained proper and updated records. Present system of accounting and recording transactions, does not allow EPFO to track pre-mature withdrawals.

Pre-mature withdrawals—of retirement funds—is allowed—without any taxes-- under Indian Income Tax Act, only under the following situations:-

• The employee should have been working or had worked for 5 years continuously for the same organization.
• Had the service been terminated before 5 years, then it must have been for reasons beyond the employee’s control.
• The accumulated balance standing to the credit of the employee should be transferred to another RPF account only.

Hence, there is no provision for pre-mature withdrawals of EPFO money—tax free unless one of the above conditions arises.

Employees are able to withdraw their PF balances, only because EPFO has not upgraded/modedrnised its accounting system.

The only solution to plug tax leakages lies with EPFO—aggressive fundamental reforms are needed to change the way a corpus of Rs. 170000 odd crores is managed by EPFO. Record keeping has to be improved—and so should the returns being generated by it.

EPFO presently has no system to track workers (or account holders) who have switched jobs. The archaic records do not offer seamless portability. These handicaps negate the very purpose of EPFO—provide & manage retirement money!! In absence of portability, the worker switching jobs is most likely to withdraw his PF dues rather than have it transferred to the new employer.

The only solution to EPFO woes is to offer workers an option to move to NPS (New Pension Scheme) which not only offers seamless portability with restriction on withdrawals, but also has institutional framework to generate superior returns-an obligation--of both the government and EPFO trustees—which is more often overlooked for short term benefits—viz; 9.5% interest only for 1 year (which in all likelihood will be taxed by government)