EPFO hostages remain PDF Print E-mail
Wednesday, 28 December 2016 01:04
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Two years after Jaitley’s budget promise, little action   


Nearly two years ago, while delivering his budget speech, finance minister Arun Jaitley talked of how “both EPF and ESI have hostages rather than clients”. He then spoke of how workers needed to be provided with the option of choosing either EPF or the New Pension Scheme (NPS). The problem is, as a Business Standard story points out, the necessary change in the law has got stuck at the law ministry. While the exact objection is not clear, the government needs to sort it out quickly since not being able to fulfil a budget promise for two years doesn’t inspire confidence.


Equally important, Jaitley needs to fix the NPS’s birth defects. While the NPS has been able to generate annual returns of 12-13%, just 40% of the final corpus is tax-free on retirement – 40% has to mandatorily be invested in annuities that, right now, generate a return of just 6-7%, while the remaining 20% is subject to a tax. Given the EPF has a 100% tax-exempt status, that’s step-motherly treatment and will ensure that, even if Jaitley were to be able to allow EPFO hostages the chance to migrate, they may not wish to. The government insistence on 40% of the corpus being compulsorily converted into annuities is playing nanny, but if the idea is to ensure a minimum monthly pension, there are better solutions like allowing withdrawal over a 15-20 year period to avoid a tax shock. Assume Rs 100 has to be annuitized, which means the husband/wife get Rs 7 per year till he/she dies, after which the child gets Rs 100. Allowing withdrawal of the corpus in 14 equal instalments of Rs 7.14 means both schemes are on a par. After Year 1, the person will have Rs 92.86 left in the account, but if this earns even 9%, it will become Rs 101.22 by Year 2. Now withdraw another Rs 7.14 and the balance becomes Rs 94.07454 … Do the exercise for 25 years, and you find the amount that can be given back to the child is just under Rs 203 – at the NPS’s current earnings, the amount will be much higher. Hopefully, the FM will sort out the issue by February 1 when he presents the next budget.


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