The good old retirement kitty where you and your employer make contributions (12 per cent each) – the employee’s provident fund account (EPFO) – can now be tapped for your contingencies. To help lower middle-class and poor families suffering from a cash crunch due to the ongoing countrywide lockdown in light of the Coronavirus pandemic, a slew of welfare measures were announced by the FM. Addressing the organised sector employees’ concerns, she also made an announcement pertaining to easing of EPF withdrawals – a move that can help even the relatively well-off tide over a liquidity crisis.
Withdrawal from the EPFO eased
You can now withdraw up to 75 percent of your EPF corpus or three months’ wages, whichever is less. “This will benefit 4.8 crore workers who are registered with the EPFO,” Sitharaman said in her press conference earlier today. The move would help salaried individuals tide over the crisis.
There will be an amendment to the EPFO guidelines very soon – within a matter of days, experts say. Sitharaman reiterated that all of today’s measures will be implemented with immediate effect, after which you will be able to make partial withdrawals to deal with contingency needs. This facility is only available for three months – April to June 2020. The modalities of the amendments are awaited.
“Three months’ wages should mean the part of your salary taken into account for calculating provident fund contributions of the employer and employee,” says Sonu Iyer, National Leader, People Advisory Services, EY. The purpose of this modification is to allay employees’ concerns and assure them that they have one more source of funds to dip into in case the need arises.
What is EPFO?
The EPF is a defined contribution scheme that is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Your organisation has to mandatorily deduct a portion of your salary and an equivalent amount is to be paid from its end into a corpus that is managed by the EPFO till you reach your retirement age. When you retire, you can withdraw the entire corpus as a lump-sum. Typically, employers deduct 12 per cent of basic salary plus house rent allowance (HRA) as employee’s EPF contribution. They also contribute an equivalent amount to your PF corpus (of the 12 per cent paid by your employer, 8.33 per cent is moved to the EPS (employee pension scheme). The interest rate is fixed annually and is at 8.5 per cent currently. You can also make additional voluntary contributions to the EPF, which enjoy the same rate and tax-free status.
At present, employees are allowed to make withdrawals only under specified circumstances. These include funding the purchase or construction of a house, home loan repayment, critical illness of the employee or family members, marriage of self, children and siblings or children’s higher education. “These are permitted if the employee has put in a minimum number of years in service,” points out Saraswathi Kasturirangan, Partner, Deloitte India.
The government’s latest move is likely to help employees looking to scrape through the temporary financial crisis and manage any contingencies during the period. However, financial planners recommend using this as the last resort, only after other options have been exhausted. “You should first look at liquidating your liquid funds, fixed deposits or even taking a gold loan or advance from your employer, for instance. While such loans will come with an interest, at least there will be no irreversible damage to your retirement corpus,” says Rohit Shah, Founder, Get You Rich. Withdrawing 75 per cent of your corpus (or three months’ wages) could set your retirement planning back by months. Ideally, you must maintain an emergency corpus worth at least six months’ total expenses to tackle any unforeseen crisis.
Affected companies and employees get relief
There’s more. In another move that will benefit low-income employees who draw up to Rs 15,000 a month, the finance minister declared that the government will fund the employer and employee PF contributions for three months. Again, this will mean more money in the hands of such employees and also reduction in outgo for employers. Although the broad contours of the scheme have not yet been disclosed, it effectively means that employers of staff who qualify for this scheme will not deduct 12 percent from their own salary for the next three months. Similarly, companies too need not set aside the mandatory contribution 12 percent of their qualifying employees. Instead, the government will fund the payouts into such employees’ EPFO corpuses. This comes as a relief to companies that are directly affected by low business activity due to the lockdown in light of the Coronavirus pandemic.
However, this announcement comes with restrictions. “While the scheme is applicable to companies with up to 100 employees, the additional condition that 90 per cent of employees should earn less than Rs 15000 per month will limit the applicability. The government should also clarify whether the Rs 15000 refers to wages for the purpose of PF contribution or total wages,” adds Kasturirangan. The underlying message though is that the scheme is only open to those from the weaker sections of the society and not to all salaried individuals.
Experts believe that today’s announcements are the first to come in a series of larger financial packages that the government ought to announce shortly.