Maha Bharat: Episode 48

Provident Fund: What is it and will you ever see your money?

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Did you know that the government of India holds money that belongs to you and me? And even more interestingly, the amount of our money held by the government is almost the same as the combined market value of 6 of India’s biggest banks?

On this episode, we talk about the Provident Fund. That little bit of money that is missing each month from your pay check, could be your life saver when you are done working.

Show Notes

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Links to clips used in this episode —

Full Transcript of Episode 48 –

Doston, for many of us, when we get our salaries every month, there’s one thing we notice: a certain amount of our salary is kept aside every month by the company. Why? We’ve heard some reasons here and there — taxes, savings, pension, retirement…

But I’m actually talking about the Employee Provident Fund!

Have you wondered what that is and why your money is being put there instead of being given to you? 

Well the short answer is, that the amount deducted for the provident fund goes straight to the government and the government invests it in a fund called “The Employment Provident Fund,” which we commonly call the Provident Fund or PF. After a certain number of years, the money from this fund comes back to us but has increased because of interest earned. 

Now, this is not a small fund. Every month, a little amount from each of our salaries, from crores of people like us goes into this fund. And for comparison, this fund is as big as the total market value of ICICI, SBI and HDFC Bank combined!

The actual amount if you are wondering, is 14 lakh crore rupees! 

This is a huge amount of money, money that comes from our pockets. So is it any wonder that over the years, small and big scandals, protests or court cases have cropped up over EPF? People want the right to know what happens to their money, and how. PF is often called one of the safest, more trusted savings schemes by the government. So why do we hear about these problems now and then? Will you actually get your provident fund back?

We’ll try to answer all these questions in today’s episode. 

A Provident Fund is a type of pension scheme. It has a simple condition: every month, you add a certain amount into the fund. After a fixed number of years — or when you retire — you can withdraw this money as a form of pension. This is a standard retirement savings scheme that many countries have, with some differences (kuch-kuch farak) in the conditions (shartein). Let’s compare our EPF to the Social Security program in the USA. 

Under the Social Security act passed in the U.S., every employee is “taxed” 12.4% of their earning. Half of this amount is paid by the employee, and the other half by the employer. All of these taxes go into a social security trust fund. After the employers reach a certain age, they or their family can access money from this fund. 

The employee Provident fund is similar when it comes to the process: every month, a certain amount is paid by you and your employer to the government, and you can get this money back later. Only some of the smaller details are different between these two schemes.

And just like social security, EPF is a legal provision! 

In 1952, the government passed the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Under this act, the government set up a Central Board of Trustees to head this scheme. This is a group of representatives from the government from different states, including both employers and employees. 

Yeh ho gayi central board — now, this central board is assisted by an organization, the Employees Provident Fund Organization or the कर्मचारी भविष्य निधि संगठन. This organization takes care of the details of the scheme, enforces it and also provides service to employees and employers. 

That was the structure — so, how does the Employees Provident Fund work?

This fund includes every establishment ya company in India that employs 20 or more workers. For employees whose basic salary is less than Rs. 15,000, EPF is compulsory. In this case, 12% of your salary is deducted and added to your EPF fund every month. Additionally your employer also adds the same amount to your fund. 

What if your salary is more than 15,000 rupees? You can still be a part of the EPF scheme, but the amount deducted will still only be 12% of 15,000. If you want to increase this percentage you can — but your employer will contribute only up to 12% of Rs. 15,000.

Every year, an interest builds on this amount. This rate of interest changes every year, currently it is 8.75%. For reference, this is almost double the amount of interest you could get from money saved in a bank account or a Fixed Deposit!

In simple words, the EPF scheme helps us build a savings plan for our retirement while we are still employed and working.

Of course, there are a lot more details to this scheme, that we’ll try to understand one by one. But before we get to that, let me tell you about another kind of Provident Fund — the Public Provident Fund. Both of these funds are under the purview of our government, so sometimes we may confuse one for another. Usually, when someone says “Provident Fund”, they are generally referring to EPF. But these are two different types of a provident fund. 

The Public Provident Fund, or PPF, was created by the government in 1968. Just like the EPF, we contribute a certain amount of money to the PPF every month — and withdraw it at a certain time. Lekin iski shartein alag hai. 

For instance, a PPF is not compulsory, and does not involve employers or companies at all. Any Indian citizen can open a PPF to collect their savings. There is no requirement for a monthly contribution — you just have to contribute at least once in a year. The minimum value is Rs. 500 and maximum – Rs. 1.5 lacs. Yahan pe, there is no condition of retirement, but a number of years. You will get your money back in 15 years of time — I know, sounds like a long time, right?

Don’t worry, there are some exceptions here. You can actually withdraw up to 50% of your savings after the fourth year. Also, you can close your account after 5 years and withdraw all the money…but only in the case of special conditions, such as medical bills or fees for higher education. 

[We hear a news report about a protest in Bangalore]

Nearly 1.25 lakh workers from garment factories in Bengaluru, and most of them women — came out to protest in Bangalore. This was in response to a change in one of the most important parts of a Provident Fund: withdrawal. 

Wait — so when can we withdraw our Provident Fund amount? According to the act, we can either withdraw the full amount after 2 months of unemployment, or at 55 years of age. In 2016, the government issued a new rule: you can only withdraw the entire amount of your Provident Fund at 58 years of age. This is what caused the protests in Bengaluru. 

Let’s take a minute to understand this.

The EPF is a retirement fund. But for many workers in our country, like the garment workers of Bangalore who protested, it is not only a retirement fund, but also an emergency fund. These workers are often paid low wages. In the time of financial crisis or unemployment, they depend on their EPF to get out of these crises. 

For them, to extend the age of withdrawal to 58, is a cause of great concern (bahut chinta ki baat). 

The protests were on such a large scale that the government ended up cancelling the new rules altogether! In 2018, the government made the withdrawal rules even easier — now, we can withdraw your entire PF account after one month of unemployment. And we have thousands of garment workers from Bengaluru to thank for it!

Before we talk some more about Provident Fund, are you wondering when it all actually started?

If you’re thinking about what a provident fund scheme is, where your money is going, when you’ll get it back…maybe you’ll find consolation (sahanubhuti) in the fact that we were probably having the same thoughts almost a hundred years ago!

That’s because the first Provident Fund Act was actually enforced by the British government in India, in 1925. It looked different from the scheme that we’re familiar with, but the gist or summary was the same — yahi, a certain amount would be deducted from the employees’ salary, and saved with the government. But this act was a little limited in its scope — it did not extend to all industries. However, this was not a major concern (chinta ki baat) for many many years…almost until we were independent from the British government.

Today, all of us in varied (alag-alag) industries have access to the Provident Fund — and we owe this to one industry in particular: the coal mining industry!

Hua yeh tha, that just as we were leading up to independence, the question of laws for workers and labourers became more and more important. Since 1940, we have had conferences every few years to discuss the problems and policies of the labour force in our country. These were called Indian Labour Conferences. There were also separate labour committees that made important laws, such as the Minimum Wages Act. 

There was another subject that kept coming up in these conferences: a retirement plan for workers. In the Indian Labour Conference of 1948 it was agreed that a proper provident scheme for workers — of all sectors, and not just the government companies — might be a good idea. But before we enforced it, we thought – let’s try it out in one sector first, see how it goes. And this is where the coal mining industry comes in. 

So in 1948, the government passed the Coal Mines Provident Fund and Miscellaneous Provisions Act, which introduced a provident fund scheme for coal mine workers. Under this scheme, 12% of the employees’ salary was added to the fund every month, and the employers would contribute the same amount. 

So, when this scheme proved successful, the government decided to introduce a common provident fund scheme for employees in all sectors — government as well as private. 

This was the Employees Provident Fund.

On January 1st, 2020, a small percentage of us got some good news. No I’m not talking about new year greetings! I’m talking about the pensioners in our country, who came to know that they now had an option to withdraw the entire amount of their pension together, instead of a few thousands every month. 

And that’s a whole lifetime of savings!

This was good news for more than 6 lakh pensioners. Why this celebration? Because they could now use this lump-sum amount to pay for emergencies, medical bills or vacations. 

Okay, sure, but what does this have to do with EPF?

That’s where it gets interesting. Did you know that when your employer contributes 12% of your basic salary to the EPF fund, 8.33% of it actually goes into your pension fund? 

Now, the Employee Pension Scheme is similar to the EPF that we have been talking about — essentially, a fund with monthly contributions that will be given to you after you retire. Farak yahi hai, that you, the employee, cannot contribute to EPS. Your company contributes 8.33% and additionally, the government also adds 1.16% of your pay to your pension fund.

Also, the amount that can be added to EPS is capped at (zyada se zyada) 8.33% of your salary only up to Rs. 15,000. So if you earn more than Rs. 15,000, only Rs. 1,250 will be added to your EPS every month. 

Another big difference is that there is no interest on the savings in the EPS fund.

So, why this different scheme? Well, this is a proper pension scheme — matlab, you can either withdraw it in whole or get it monthly after you retire. But yes — you should have worked for 10 years before you withdraw this amount. Also, if an employee dies, the family members get the amount from the EPS fund as pension. 

But in the last few years, there has been public opposition to one particular part of this scheme — can you guess which one?

It’s the amount deducted every month. Now, imagine if your salary is more than Rs. 15,000 — maybe Rs. 30,000 or even 1 lakh rupees. And yet, only Rs. 1250 gets added into your pension fund every month.

In fact, before 2014, some companies used to add 12% of your full salary — but in 2014, the government amended the Employees Pension Scheme and put a cap: no more than 15,000 can be calculated as the base for the 12% deduction. 

But this was considered unfair. In 2018, this amendment was challenged in the Kerala High Court by several people. In one such case, P.Sasikumar vs Union Of India, the petitioners’ complaint was that the new amendment reduces their pension considerably. During the court proceedings, the lawyers argued – the workforce in India has increased, the average salary of workers has increased and thus the fund has also grown larger. So shouldn’t workers be getting a higher amount of pension after they retire?

So, the Kerala High Court ruled that this cap would be removed, and the contribution to the whole Employee Provident Fund itself can be calculated at more than Rs. 15,000. In 2019, the Supreme Court, too, supported this judgment. 

This was great news for workers — lekin, evidently, not so for our government. Immediately after the Kerala High Court verdict, the Employee Provident Fund Organization filed a petition asking the court to review their judgment. Along with this, the Ministry of Labour also filed an appeal with the same request. 

The Supreme Court will make a final decision on this matter soon. This judgment is an important one — it will determine your take-home salary right now, as well as the pension you will get when you retire!

Chalo, we know almost everything about EPF and the pension scheme now. There are some smaller details here and there, which you can find out on the official website of the EPFO. Such as this: no tax is charged on your EPF savings — and it cannot be possessed by banks if you fail to repay your loans!

Ek chhoti-moti details toh ho gayi, but let’s get to the point of this episode. 

Are Employee Provident Funds a good idea? Have they been working?

Let me tell you the first complaint employers have against this scheme: why take my money every month without my consent? As we know, the EPF scheme is mandatory for companies with more than 20 employees in India. There is no choice in this matter — and in many cases, this is against the employer’s wish. 

But there is another crisis, too. 

So far, we’ve talked about the large fund that the government has built up from our EPF amounts. So, have you wondered: what does the government do with this money?

Here’s the answer – invest it! The EPFO invests at least 45% of their funds into government securities. The rest of the amount is also invested in other sources. Sounds good so far — as long as we get our money back, what’s the problem?

Remember, along with your EPF amount, you also get an interest. In the year 2020-21, the interest was 8.5%. But late in the year 2020, the government announced that they will not be able to pay us the full interest amount, instead paying us in parts. First around 8% and then the rest. Why? EPFO has had troubles getting back the money it invested — especially due to Covid. 

Chalo, yeh ek example hua, where the employees have something to worry about. But the inefficiency of EPFO can be harmful to the government too. 

In 2016, our Finance Minister at the time, Arun Jaitley announced the budget for 2016-17 in the Parliament. One of the government’s new schemes for that year was…

[We hear the voice of Arun Jaitley announcing the budget allocation for EPF]

This was the Pradhan Mantri Rojgar Protsahan Yojana. The government offered to pay the pension fund for new employees instead of employers — to encourage companies and employers to hire new employees. The yojana wanted to focus on the informal sector, so the budget set aise Rs. 1000 crore for the pension funds of employees with salaries up to Rs. 15,000. 

That sounds beneficial, right?

Except, by 2019, the government discovered that almost 9 lakh people from 80,000 companies had duped the system and transferred the government’s funds into their accounts, despite not being eligible for the program…causing a loss of Rs. 300 crore to the Centre!

As soon as the EPFO came to know it started the process of retrieving the fund. 

These are the criticisms of the EPF scheme. But there’s an advantage that you might not have thought of: the ease of withdrawal. 

But did you know that you can also withdraw an amount from your EPF account if you want to…renovate your house? Or, in fact, because you are facing financial troubles during a pandemic? That’s right, the EPFO allows certain such conditions — marriage in the family, medical expenses, purchase of land, etc that let you withdraw your money. So in many cases, your Provident Fund savings might come useful to you long before your retirement. 

Doston, yeh toh baat ho gayi about what is a provident fund, why it has been established, what you should be careful of and how you can get your money. But there is a last part of this conversation, and perhaps the most important. Soon, there will be no separate Employee Provident Fund.

[We hear the voice of a news reporter updating us about three new labour laws]

That’s right — in September 2020, the government passed three bills, jise hum 3 labour codes kehte hai. These were the Industrial Relations Code bill, Code on Social Security Bill and the Occupational Safety, health and Working Conditions Code Bill. One year earlier, the parliament had also passed another labour code bill, the Code on Wages bill. None of the new changes in these bills have been implemented yet, by the way.

But wait — how are these bills connected to the Employee Provident Fund?

That’s because together, these four codes have replaced 29 existing laws that related to the rights of workers, such their minimum wage, safety and rights of trade unions. One of these laws is the Employee Provident Fund. 

These laws have brought many changes. Some have been welcomed — such as the effort to extend benefits to gig workers, platform workers and labourers in the unorganized sector. At the same time, many new changes have been opposed. For instance, the new labour codes make it possible for companies to shut plants and fire workers without government approvals. The new laws have also made it more difficult for workers to go on strike. 

Kehne ka matlab hai, that there have been many important changes. So, what about the Employee Provident Fund? Mainly, there will be a change in our take-home-salary. Matlab, the contribution of the employer in our EPF — which is 12% right now — may increase.

Let me explain how. 

Ab hua yeh hai, that the new code on wages, defines certain conditions for this basic pay — which is also called “wages”. One of these conditions is that the basic pay should be at least half of our total salary. 

So when the Act is enforced, our basic pay may increase. And if it does, then the amount contributed into our EPF accounts by our employers may also increase, accordingly. But remember what we discussed earlier? If your salary is more than Rs. 15,000, then this may not apply to you. 

Apart from this, the basic structure of Employee Provident Fund will not change. Just the name of the act under it falls will be different. 

There are several advantages of an Employee Provident Fund. The fact that it has tax benefits, it has a pension and life insurance scheme, and the option to withdraw the fund in the case of emergencies. 

But it is a mandatory scheme for many of us — which means that it is also important for us to understand how this scheme works and what are the new changes. As I said, it is our right to know where our money goes!

I hope we were able to understand just this today. That’s it for this episode — I’ll be back next week with a brand new episode of Maha Bharat!

Credits

Narrated by – Dhruv Rathee
Producer – Gaurav Vaz
Written by – Anushka and Gaurav Vaz
Title Track Design – Abhijith Nath
Audio Production – Madhav Ayachit