Leave Common Man’s Savings Alone

There is certain style in the way Narendra Modi and his group of Ministers look at eating into common man’s savings. But, in less than two months two proposals to this effect had to be rolled back due to protests from workers and trade unions.

The latest being Modi’s Labour Minister Bandaru Dattatreya biting dust with rolling back of his anti-people provident fund (PF) withdrawal norms that had restricted complete withdrawal from PF account before the retirement age of 58 years. This move makes one wonder if there is a hidden agenda to finish off the EPF and other social security schemes like ESI.

As per Dattatreya’s new proposal, employees will be able to withdraw only their contribution to their provident fund accounts. Dattatreya had been adamant to push ahead with the new set of rules as it would have given a substantial amount of funds with the government to play in the capital markets.

Image Courtesy: flickr.com

The February 10 notification had restricted the withdrawal of employers' contribution and interest earned on it under the EPF scheme till retirement or 58 years instead of 54 years earlier.

Here is the synopsis of the event.

1) In February, the government said that to claim or withdraw what your employer has deposited for you, you must wait till you turn 58 (the age limit was earlier 54).

2) That rule has been cancelled on Tuesday.

3) Once you are hired by a company which has at least 20 employees, a portion of your salary with a matching amount from your employer is automatically deposited in an account that earns interest.

4) Barring some exceptions, to withdraw the entire amount you have contributed, you need to be 58, which is the official retirement age in India. Partial withdrawals are permitted for buying a home or funding a child's education, for example.

5) Many labour unions objected to the new rules saying that workers in some sectors -garment factories, for example - are unsure of being employed after they turn 50; so making them wait till they are 58 (the official retirement age) to collect what employers have contributed for them does not make sense.

6) In Bengaluru, thousands of garment factory workers set buses on fire and clashed with the police on major highways on the outskirts of the city.

7) In his Union Budget presented in February, Finance Minister Arun Jaitley announced that 60 per cent of the amount in your provident fund would be taxed when the account was emptied out or when you cashed in what you had saved.

8) After outrage from the middle class, that plan was cancelled.

9) Now, the government is considering whether you should be allowed to withdraw the entire savings accumulated in your provident fund for a fixed set of criteria like medical treatment for a serious illness, a home purchase, or the education or marriage of an employee's children.

10) Workers who have been unemployed for two months can claim the entire amount accrued in their provident fund.

The move drew flak from trade unions and workers. Under the existing rule, employees can withdraw the full PF balance if he or she is out of employment for continuous 60 days. That includes 12% employees' contribution, 3.67% contribution from the employer and interest earned on this in any given year. However, the 8.67% of the employers' contribution to pension under the EPS cannot be withdrawn, thus restoring the original withdrawal provisions under the EPF scheme.

In the budget 2016 Finance Minister Arun Jaitley wanted to impose tax on the withdrawal from Employee Provident Fund (EPF) account. That time only the message was clear that either you invest your life long savings in the market or get taxed. Many point out that the government is trying to camouflage its intentions by talking of pension for the ‘private sector workers’, when employees of Public Sector enterprises, both state and central are also enrolled in EPF.

And also just to recollect, the government also recently slashed interest rate payable on small savings including the provident fund – apparently to bring the rates close to market rates. This market oriented move (In all its true meaning) to trim the assured returns of crores of working Indians will result in a 90 basis point lower earnings in the April-June quarter. And in all likelyhood, the rates may be further cut or remain at the same for the entire fiscal, if one makes a reading from the government’s actions over the last 22 months.

In case of PPF, the most popular scheme for middle-class savers, the reduction of 60 basis points (100 basis points equal a percentage point) is among the sharpest in nearly 15 years.

In normal parlance, this would translate, if the rates remain unchanged during the next financial year, that someone with Rs 5 lakh in his PPF account would face a hit of Rs 3,000 in 2016-17.

With lower interest rates, typically, the propensity to save would come down, redirecting the excess funds to alternate investment options like stocks / commodities or increased spending. This reduction in interest rates in small savings will hit the poor and the middle class badly as bulk of their savings are in small deposits. The provident fund, with a corpus of over Rs. 5 lakh crore remains a more attractive options for the salaried, especially with tax benefits thrown in.