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Monday, 16 March 2015 04:42
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Charging EPF on entire salary will hit move to NPS

Given how Crisil projects the burden of pensions for India’s 60+ population rising to 4.1% of GDP by 2030—that is higher than FY16’s entire fiscal deficit of 3.9%—finance minister Arun Jaitley did the right thing by announcing he was going to end the Employee Provident Fund Organisation’s (EPFO) monopoly and encourage people to migrate to the New Pension Scheme (NPS) by offering more tax benefits. Apart from the fact that NPS has generally been offering higher returns than the EPFO, the more important fact is the NPS offers subscribers the choice of where they want to invest—or the proportion of debt and equity—as well as fund managers; commission charges in the NPS are also a fraction of those charged by the EPFO. Also, since porting is a built-in feature of the NPS—the EPFO is only now talking about this—there is no question of subscribers not getting back their deposits as they move from one job or city to another; the high unclaimed deposits with the EPFO is testimony to how subscribers have been short-changed.

While the finance minister still needs to fix the basic imbalance between the NPS and the EPFO—the latter’s withdrawals are tax-free while those of the NPS are not—and also clarify that all employees can shift away from EPFO to NPS, there could be a more serious problem afoot. A report in The Times of India suggests the labour ministry which is piloting a new legislation to effect the finance minister’s plans to allow employees to choose between the EPFO and the NPS plans to restructure the base on which contributions to the Employees Provident Fund (EPF) and Employees Pension Scheme (EPS) are deducted. Right now, both EPF and EPS are deducted on the basic salary—various allowances are not added to this. What is being proposed is that most allowances be added to the basic salary for calculating the EPFO deductions. Were this to be done, the amount of money being compulsorily deducted for the EPFO would rise dramatically. In other words, even if a section of workers move away from the EPFO, the annual inflows of the EPFO will probably not be hit as badly, indeed they may even rise—in other words, the EPFO will not feel the need to modernise its operations or invest better to be able to offer higher returns to subscribers. Also, for those employees who do not have the option of moving out—the Budget suggested only certain categories of employees, probably below a certain income threshold, may be allowed to opt out—the forced savings, and in an organisation that offers lower returns, will rise dramatically.  The government has to ensure the labour ministry is not allowed to thwart the Budget’s good intentions.



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