EPFO's Diwali gift: More members to get pension, higher in-hand amount on retirement; here's how

Coming just before Diwali, these steps could be seen as a Diwali gift from the provident fund body for EPF members. In this article, let's understand how the EPFO's new rules will ensure that most members get a pension, or become eligible for a pension, and also receive a higher amount from their EPF accounts on retirement.

What is happening currently?

Currently, a majority of EPFO members are deprived of a pension, or they become eligible for a very small amount of pension, under EPS. They are also eligible to receive a very small amount from EPF on retirement. This is because of the following:

• On retirement, many members have a very small amount in their EPF accounts as they keep withdrawing for various reasons during their working years.

• Due to frequent withdrawals, members fail to enjoy the benefit of compounding, which is currently happening at 8.25% interest.

• Many members fail to complete the mandatory 10 years of service to become eligible for a pension under EPS

• On losing a job, many members withdraw from their EPS pension accounts. This deprives their families of a pension in case of the members' untimely death.

The EPFO's new rules have tackled all the above issues as follows:

First, EPF members will not be able to withdraw 25% of the amount from their EPF account during service years. This will ensure that on retirement, they have a decent amount in their EPF account.

Please note that in case of a job loss, members will be able to withdraw 75% from their EPF account immediately and 25% after 12 months. In case the member gets employed again within these 12 months, the new rule will ensure that their previous account starts receiving contributions from the new employer.

"In case of unemployment, 75% PF balance ( that includes employer and employee contribution and interest earned) can be withdrawn immediately. Remaining 25% can also be withdrawn after one year," EPFO says.

However, in case of emergencies and some special situations, members will be able to withdraw the full amount with no questions asked.

"Full withdrawal of the entire PF balance (including the minimum balance of 25%) is also allowed in case of retirement after attaining 55 years of service, permanent disability, incapacity to work, retrenchment, voluntary retirement or leaving India permanently etc," EPFO says.

Second, the above 25% contribution cap will ensure that members can accumulate a larger provident fund amount for post-retirement needs.

Third, the amount from the EPS account can now be fully withdrawn after 36 months of losing a job.

According to the EPFO, approximately 75% of EPS members withdraw their entire pension amount within four years of service, i.e., within less than 10 years. This ends their membership and makes them ineligible for future pension and social security benefits.

Further, if the pension fund is not withdrawn then the member’s family remains eligible for pension benefits for up to three years even after contributions stop due to the member’s death. Once withdrawn, this benefit is lost.

"In order to encourage members to meet the 10-year eligibility for getting pension and to allow his/her family to be eligible for benefits in case of his/her death, the proposed provision allows the member to withdraw pension accumulation after 36 months instead of 2 months. This will ensure long-term social security in the form of pension for the member and his family," EPFO says.