EPF (Benefits and Loopholes)

We have divided key takeaways into 2 parts that is the benefits and the loopholes, talking
about the benefits, the first benefit is the

1. Capital appreciation – The PF scheme offers a pre-fixed interest. Additionally, rewards

extended at maturity further ensure growth in the employees’ funds and accelerate capital
appreciation.

2. Risk Profile- As a hybrid defined benefits plan, PF guarantees its investors a defined
return rate which is considerably higher when compared to other perceived stable
investment opportunities that are protected, and are not threatened by fluctuations in the
market.

3. Tax-saving – Under Section 80C of the Indian Income Tax Act, en employee’s
contribution towards their PF account as well as earnings generated through EPF scheme
are exempted from taxes which are availed up to a limit of Rs. 1.5 Lakh. The tax benefits
ensure higher and improved savings and an individual’s purchasing power in the long-
term.

4. Corpus for Retirement – Around 8.33% of an employer’s contribution is directed

towards the EPS. In the long run, the sum deposited towards the same helps to build a
healthy retirement corpus extending a sense of financial security and independence after
retirement.

5. Emergency Corpus – Uncertainties are a part of life. Therefore, being financially

prepared to face such unwarranted situations is the best an individual can do to deal with
exigencies where EPF funds serve the purpose.

6. Easy premature withdrawal – Members of EPF are entitled to avail benefits of partial
withdrawal to meet their specific requirements like pursuing higher education,
constructing a house, bearing wedding expenses or for availing medical treatment.

7. Insurance benefit- In the Employees Deposit Linked Insurance (EDLI) Scheme, which is
an insurance cover provided by the EPFO the registered nominee will receive a lump-sum
payment in the event of the death of the person insured, during the period of the service.
The minimum assurance amount being 2.5 lakh and maximum being 6 lakh. Also, on the
occasion of the death, the family members get the Pension.

Loopholes :
1. There is prevalent obscurity with regard to the definition of "basic wages" and
Contributory wages and this lack of lucidness could be taken an undue advantage of in
terms of deceitful forging of contributions of the employer. What constitutes 'basic wages'
for the purpose of PF contributions has been a highly litigated subject in India. In this
respect, the Supreme Court of India passed a landmark ruling on February 28, 2019
clarifying its position in relation to various allowances forming part of the Contributory
Wages. The definition of 'wages' under the EPF Bill, 2019 sets out an elaborate list of items
that would be excluded from the definition such as statutory bonus, any commission paid
to an employee, gratuity, retrenchment compensation etc.

2. Employees are not given the power of choice with regard to making contributions even if
they want to willfully discard the trade off and attend the current consumption of
disposable income. Therefore, in the Union Budget 2015-16, there was a recommendation
from the Hon. Finance Minister to allow employees below a certain threshold of monthly
income an option to decide whether to make PF contributions or not, without affecting or
reducing the employer's contribution.

3. The PF inspectors are currently permitted to conduct an inquiry as necessary to (a)

determine the applicability of the Act (b) determine any amounts due from employers
under the Act. It does not provide for a limitation period. This essentially means that they
can go back and conduct audits for a retrospective period, without any limit on the look-
back period. An introduction of a fixed timeframe for concluding the inquiry will help to
ensure that the power vested with the authorities is not abused.

4. It is also interesting to note that the penalty amounts have not been revised since 1988.

5. In October 2008, India brought foreign nationals working for an establishment in the
country – whether a foreign company or a business domiciled in India, under the purview
of the Act.

Accordingly, every foreign worker employed must become a member of the PF from the
first date of his employment. There is no minimum period of stay in India for activation of
PF compliance and there is no cap on the salary on which contributions are payable by the
employer as well as the employee.

6. Every business entity employing more than 20 workers makes it mandatory for
employees and employers to contribute towards retirement and insurance scheme. In case
of lay-off of any employee reducing the total number to a 19 or 18 , the other employees are
still to be made contributions for including the ones that have been laid off since the Act
has been legislatively applied to the employer. This creates unnecessary financial burden
on the employer.
7. Withdrawing from the PF can be anti-productive on two counts.

The member withdraws amount which is usually blown away by discretionary expenses
and retirement savings are back to square one.

If the individual withdraws his PF balance before completing five years then the amount
becomes taxable.

In conclusion, we think that the intent and purpose of the act has been fulfilling and
conformed and the corroborative figures have been quoted by Dorothy. However, there are
significant loopholes too which arose over time and the EPF Bill 2019 if passed shall cater
to those loopholes and make the implementation even more efficacious.