Tightening of EPFO withdrawal norms
Retirement fund body Employees’ Provident Fund Organisation (EPFO) has tightened norms on withdrawal of provident fund (PF) recently. Read more on that here.
One of the pertinent changes is in the restriction imposed on withdrawing the employers’ contribution before 58. This is a good thing in my opinion and here is why:
- EPF savings is a targeted savings for retirement. It should be left untouched till one retires.
- Distress withdrawal rule of the past has often become the path of least resistance to be tapped as a easy source whether one is in distress or not. Not a good thing. At least, this ensures that employer portion is locked allowing you to tap only on retirement.
- In contrary to what many may think that GoI needs your money by retaining employer contribution, they may be wrong – GoI don’t. Recall the changes in 2012 where GoI imposed a restriction that only active accounts will earn interest. Many were forced to withdraw unwillingly. Why? Leaving it there and earning inflation-equated (more or less) returns was a good deal for many. Not for GoI.
- GoI is more flexible than several other countries I know when it comes to premature withdrawal of retirement accounts. In several countries, they do not allow you to touch till 59. No exceptions. Australia is one for instance. Few allow you to touch but discourage by charging penalty and taxing the proceeds. Deterrence imposes discipline which is still good, as situations masquerading as distress will get scrutinized more.
- Many may think that employer contribution is rightfully their own because it was part of Cost-To-Company (CTC) and has the rights to withdraw. True. Gratuity is part of CTC too. You don’t earn it unless you complete 5 years. Treat the employer EPF contribution as a deferred vesting which is in your interest.
It is your money and you have rights. No questions about it. This is less about ‘rights’ and more about what it is intended for and and doing what is right. Doing the right thing for many often comes from self-discipline or deterrence induced self-discipline. There are ‘exceptions’ as always but the policies and rules are designed for majority by and large.
Do any of you see this irony? There is a mad rush to get NHAI tax-free bonds at 7.5% interest when EPFO paid 9% for 2015-16. While I understand that the latter returns are not locked and reset each year, I still see that the 10-15 year averages is more likely to be in favor of EPFO. More importantly, EPFO does not carry the interest rate risk of NHAI – EPFO is more like a Short term(for interest reset) Floating-rate tax-free bond which is a desirable attribute in my opinion. Buying a NHAI 15 year bond with a hope to meet the expectation of inflation-maintaining returns is a long term call on the economy and interest rates. Not an easy one to get right with history reminding us often how fallible our experts’ predictions are even for short duration.
Update: Govt has rolled back the restriction imposed in Apr 2016. Read more on that here.