New Indian Regulation Allows Accounts to Accrue Interest

India’s labor ministry passed a new regulation on November 11, 2016, allowing for inactive employee provident fund (EPF) accounts to accrue interest. As per the notification, EPF accounts that are inactive for 36 months or more will no longer be considered “inoperative” and will continue to earn interest. As such, the EPF account will continue to have an active status irrespective of the employee’s termination, unless the employee withdraws the cash from the account or gets another job within two months with another employer. Moreover, the new regulation will allow for the transfer of an existing EPF account to one under the new employer. The interest payable is notified annually, and for 2015-2016, it was set at 8.8%.

Since April 2011, accounts that were inactive did notearn interest. If a person quit, was unable to get a new job, orfailed to transfer his or her EPF account to a new employer,the funds in their account were not considered eligible forearning interest. After the new notification, EPF accountswill now be deemed inactive only upon the account holder:retiring at age 55, subsequently leaving the country, andnot withdrawing from his or her EPF balance within 36months. The developments bode well for millions of workingIndians, especially for those who want to leave jobs for selfemployment,start a new business, or work with smallercompanies that do not subscribe to the EPF scheme.

The Employees Provident Fund Organization (EPFO) isone of the largest social security providers in the country.Between 2014-2015, EPFO has received US$ 12 million (Rs88,723 crore) from employer organizations, while accountsworth about US$ 3.9 million (Rs 27,000 crore) were lyinginactive two years ago. In addition, several companieshave their own private EPF trusts. Analysts say that about3,000 trusts cater to around 50 million employees. The newregulation will thus mean an increased cost for employersrunning such EPF trusts, as they will need to provideinterest to accounts earlier designated as inactive.

Typically, employers and employees contribute 12%per month toward EPF against the employee’s basic salaryplus dearness allowance. From the employee’s share, 8.33%up to a cap of US$ 18 (Rs 1,250) goes toward the pension,and the rest is credited to the EPF account. However, forpersons who have become EPF account holders on or afterSeptember 1, 2014, the entire contribution will be sent tothe EPF account. While the EPF scheme is mandatory for asalary below US$ 220 (Rs 15,000) a month, most employeesare covered.

The changes to the EPF regulation come as thegovernment is set to introduce key labor reforms. Further, thegovernment wants to extend the social security scheme toall economic sectors, thereby expanding the EPFO network.Recently, new guidelines were issued with respect to thesettlement of death claims within seven days and retirementcases before or on the day of retirement. Other new initiativesby the EPFO include answering social media queries as soonas possible and joining common service centers (informationand communication technology access points under thee-Governance project) to facilitate the use of Jeevan PramanPatra—a Digital Life Certificate for Pensioners.

Original article posted by India Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding American investors through Asia’scomplex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a fullserviceconsultancy with operational offices across China, Hong Kong, India, and emerging ASEAN, including liaison offices in Boston and Walthamspecifically established to support our American clients, we are your reliable partner for business expansion in Asia and beyond. For inquiries, email us [email protected]. For further information about our firm and how we can support American investors in Asia, visit our North American Desk.