Government proposes key changes in Employees' Provident Fund (EPF)

An update on the recent changes proposed in the EPF Act and how it will affect employees

Government proposes key changes in Employees' Provident Fund (EPF)

The Ministry of Labour and Employment recently uploaded a copy of the preliminary draft of the Employees Provident Funds and Miscellaneous Provisions (Amendment) Bill, 2019.

The draft bill has proposed that an option will be provided to Employee Provident Fund (EPF) members wherein they will be able to switch their money from their Employee Pension Scheme (EPS) to the National Pension System (NPS). The bill also proposes to change the definition of wage in the EPF Act which will affect the EPF calculation of employees with a basic salary of less than Rs. 15,000. Finally, the bill also proposes adjustments in the Insolvency and Bankruptcy Code in order to prioritise PF contribution over other debts in case of liquidating companies.

Presently 8.33% out of the 12% that the employer contributes towards EPF goes into EPS. Contribution under EPS is calculated on the basis of formula and there is a cap on the maximum amount that can be contributed. By switching the amount to NPS the amount of pension will depend on the fund accumulated and the rules of NPS. The return stands to be higher as the NPS is linked to the market. The switching between EPS and NPS can happen back and forth.

Related: Online EPF withdrawal - What it means for you? 

Prioritisation of EPF dues over other debts will make sure that the sale proceeds from the assets of a stressed company are utilised to pay EPF contribution first and only the balance is used to pay other debts.

And under the new proposed definition of the wage for the purpose of EPF contribution, Basic Pay, Dearness Allowance, Retaining Allowance and all other allowances except the ones specified will be considered. 

Related: How to check your EPF Balance

What is the difference between EPS and NPS?

Unlike EPS, NPS is open for everyone and not just for employees. EPS is contributed as a percentage of salary on a monthly basis, whereas NPS is voluntary and the contributor can deposit in a lump sum or in instalments. The asset allocation in EPS is entirely into debt instruments while NPS can be invested in equity to the extent of 50%.

What are the tax benefits from EPS and NPS?

Your contribution towards EPS/EPF qualifies for deduction under 80C of the Income Tax Act. However, there are various other options that qualify for 80C benefits, which can be a maximum of 1.5 lakhs. The NPS has an individual tax benefit of 80CCD (1B) for an amount of Rs. 50,000. 

Related: How NPS has performed in the past 5 years? 

What are the rules on withdrawal of EPS and NPS?

In the case of NPS, the entire amount cannot be withdrawn, 40% or more of the corpus must be used to buy an annuity plan, leading to a pension income. In the case of EPS, the member can withdraw the amount if the cumulative years of service are less than 10 years. Beyond that, the member can apply in Form 10C for withdrawal or EPS Scheme Certificate and in Form 10D to apply for the monthly pension. Do you know how to claim your EPF Money? Here's a simple guide.

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