A Critical Analysis of PF Withdrawal Rules

The Employee Provident Fund is a scheme established under the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952. It operates based on a mutual contribution by the employer and the employee towards a corpus that acts as a retirement fund of sorts. Social security as welfare for the elderly is based on a conception of social security programs as a solution to market failure. The argument is that the market fails to address the concerns of the elderly adequately, and thus, government intervention is required to ensure that they are looked after.

This article explains the procedure with regards to EPF withdrawals, the rules around it and critically analyses the efficacy of the rules with regards to the objectives that it aims to achieve. It also examines the reasons behind the need for such policy initiatives by the State and juxtaposes the same with alternative ways of addressing the aforementioned market failure.

Procedure for Withdrawal

There are two significant ways of withdrawing money saved in your PF account, the first is the UAN based online PF withdrawal procedure, and the second is the physical application method.

The minimum requirements for online withdrawal of provident fund corpus are as follows:

• An active Universal Account Number (UAN)
• Seeding of EPF profile with AADHAR and verification with UAN
• Bank account to which funds are being transferred must be the same as registered with AADHAR

Following this, an individual can log in to the EPFO e-SEWA portal and select the appropriate form under the Online Claims section. Form-31 can be used to file for partial withdrawal of funds under special circumstances such as education, marriage, purchase of land/construction of the house, home renovation, home loan repayment, and towards financial expenses before retirement. Form-19 is used to claim the final settlement from the provident fund. Members of the fund who have retired from service after attaining the age of 55, retired on account of incapacity for work or under a voluntary retirement scheme or the ones migrated from India for permanent settlement abroad may use this form to generate their claims. Form-10C is used to claim withdrawal benefit under Employees’ Pension Scheme (EPS) whereas Form-10D is an application for monthly pension under the EPS.

With regards to the physical application process, the claimant must download the AADHAR-based composite claim form or the non-AADHAR based composite claim form. Concerning the former there is no requirement for attestation by the employer, a claimant can fill-up the form and submit the PF withdrawal application directly to the regional PF office. However, in case of the latter, the composite claim form must be attested by the employer, bank manager, Gazetted Officer or a Magistrate before submission at the jurisdictional EPFO office.

Are the PF Withdrawal Rules too lenient?

While flexibility with regards to personal finance is preferable when compared to rigid schemes that place constraints on liquidity, a balance between the two is required, especially in the context of retirement savings. To understand this further, we can examine an economic concept known as the prodigal father problem. This is a justification for social security based on the assumption that parents or earning individuals engaged in extravagant behaviour when they were young and thus did not save enough to sustain their livelihood in their old age. There may be several reasons for the same; one is that people lack the requisite information to assess their needs in retirement leading to myopic financial planning that does not give sufficient weightage to the future while making decisions.

While the flexibility in withdrawal rules has helped several members navigate the economic challenges posed by COVID-19 and the widespread loss of employment it caused, we must examine the withdrawal rules from a long-term perspective. That is, ensuring that the contributions saved over a person’s lifetime are kept safe from the perils as mentioned above caused by bounded rationality and short-sighted planning.

The question that arises from examining the PF withdrawal rules in the context of the prodigal father problem is whether the PF rules are excessively lenient leading to lack/ exhaustion of savings by the time a person reaches the age of superannuation?

To understand this further, we must examine the circumstances under which a person is permitted to withdraw under the EPF scheme, given below –

Reason for Withdrawal	Applicable Conditions
Medical Reasons	Amount of withdrawal cannot exceed six times the monthly basic salary or the employee’s total share inclusive of interest, whichever is lower.
Wedding expense (Minimum 7 years membership)	Amount of non-refundable advance cannot exceed fifty percent of one’s own share of contribution with interest thereon.
Education (Minimum 7 years membership)	Amount of non-refundable advance cannot exceed fifty percent of own share of contribution with interest thereon.
Purchase of land/ Construction of a house (Minimum 5 years membership of the fund)	Amount of withdrawal shall not exceed member’s basic wages and dearness allowance for 24 months or the member’s contributions along with the employer’s share with interest thereon or the actual cost of acquisition, whichever is the least. The same is applicable for purchase of built house/flat except the first condition a 36-month period is applicable instead of 24 months.
Home Loan Repayment (Minimum ten years membership of the fund)	Amount of withdrawal shall not exceed member’s basic wages and dearness allowance for 36 months or his share of contributions along with the employer’s with interest thereon or the amount of outstanding principal and interest of the said loans, whichever is the least.
Home Renovation	Amount of withdrawal shall not exceed member’s basic wages and dearness allowance for 36 months or his share of contributions along with the employer’s with interest thereon or the amount of outstanding principal and interest of the said loans, whichever is the least.
Partial Withdrawal before Retirement	Amount of withdrawal shall not exceed 90% of the member’s credit. Can be withdrawn at any time after attaining the age of 55 years.

Conclusion

From the above we can see that almost every life-event has been covered as a reason for withdrawal. Due to this a member’s contributions end up being withdrawn much before the life-event that is intended to be covered by this scheme, namely retirement. One major reason for the repeated withdrawals are the high rates of contribution, which might explain why the Government has provided so much leniency. Therefore, for the EPF to operate as a proper retirement scheme, it is advisable that rates of interest be lowered coupled with a lower degree of leniency when it comes to withdrawals. The stricter rules would prevent individuals from tapping into their savings repeatedly and the lower rates of contribution would ensure that individuals have sufficient liquidity in terms of personal finance. This argument is linked to bringing in a larger number of workers into formal modes of employment that will lead to a consequent increase in the number of contributors.

Thus, from the above, it is clear that for the EPF scheme to achieve its stated objective of being a social security net after completion of gainful employment, it must confine its framework accordingly. This can be done by ensuring the PF withdrawal rules are made stricter and lowering the rate of contribution to reduce member’s inclination to withdraw funds repeatedly.

Do the PF withdrawal rules need to be more stringent? Would lower rates of contribution be beneficial in terms of ensuring that savings last till the age of superannuation?

Drop your thoughts in the comments below.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney. Simpliance makes no representations or warranties in relation to the information on this article.