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Inoperative Provident Fund accounts to no longer earn interest w.e.f. 1 April, 2011
In briefProvident Fund (“PF”) is the most common employee benefit in India. Under the Employees’ Provident Fund Scheme, 1952, (“EPF”), the employee contributes 12%
of their salary to the PF and the employer is required to match this contribution by contributing an additional 12%. Part of the employer’s contribution is allocated to the Pension Scheme. The money accumulated in the PF account earns interest at the specified rate set by the Government of India (“GOI”) on a year to year basis.
The current rate of interest for the financial year 2009-10 is 8.5% per annum. This interest accrues on all accounts, including accounts defined as inoperative under
the EPF. The Ministry of Labour and Employment, Government of India (“MLE”) has recently amended the EPF with the result that inoperative accounts will no longer earn any interest1.
The MLE has also amended the Employees’ Deposit-Linked Insurance Scheme, 1976 (“EDLI”)2 to provide an additional benefit for beneficiary of deceased members.
The key changes are summarised below:
1 The Gazette of India, dated 15 January 2011 (http://labour.nic.in)
2 The Gazette of India, dated 8 January, 2011 (http://labour.nic.in) www.pwc.com/in
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News Alert
31 January, 2011
PwC News Alert January 2011
2 Key Changes
EPF
• The provision relating to payment of interest on accumulated balance as provided under Paragraph 60 of the EPF has been amended so that no interest will be credited to inoperative accounts.
• Sub-paragraph 6 of paragraph 72 of the EPF has been amended. An account will now count as inoperative where no application for withdrawal under paragraphs 69 or 70 of the EPF or for transfer of fund has been made within a period of 36 months from the date it becomes payable.
• These amendments come into force on 1 April, 2011.
EDLI
• A person who is entitled to receive the PF accumulations of a deceased employee who had been in the employment of one establishment for a continuous period of twelve months preceding the month in which he/she died will also receive the higher of the following benefits:
- The average monthly wages drawn (to a maximum of INR 6,500), during the twelve months preceding the month in which the employee died, multiplied by twenty times; Or
- The average balance in the fund of the deceased during the preceding twelve months or during the period of his/her membership, whichever is less, except where the average balance exceeds INR 50,000. In such a case, the amount payable will be INR 50,000 plus 40 percent of the amount in excess of INR 50,000 to a maximum of INR 100,000.
• This benefit has also been extended to the beneficiary of a part time worker who had been working in more than one factory or establishment for a continuous period of twelve months preceding the month in which he/she died.
• The above amendments came into effect on 8 January 2011, the date of its publication in the Official Gazette of India.
Conclusion
The amendments in the EPF will have an impact on employees who have retired or are no longer working and have not yet withdrawn their money and on employees who have changed their employment but have not transferred their accumulated PF to their PF account with their new employer. Individuals who retired or changed employer three or more years ago will have to make an application to withdraw or transfer money before 31 March 2011. Otherwise, their accounts will become inoperative with effect from 1 April 2011 and will not earn any more interest. Furthermore, other employees who are retiring or changing their jobs will need to ensure that they make an application for withdrawal or transfer within 36 months so that their accounts do not become inoperative. These amendments also apply to international workers (“IWs”). Under recent amendments, PF money becomes payable to IWs who retire from services in the establishment on attaining the age of 58. Accordingly, the accounts of IWs who work in India for two to three years at the age of 30 should not be classified as inoperative, since PF money becomes payable only after they reach the age of 58. Accordingly, they can make an application for withdrawal only upon retirement on attaining the age of 58. We need to wait for further clarification from the PF authorities to discover whether they have different intentions.
PwC News Alert January 2011
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