The Employees Provident Fund Organisation (EPFO) should not waste any more time in putting its house in order. Two PF offices have now been slapped with an income- tax demand for failing to tax premature withdrawals by account-holders. The move could saddle the ailing EPFO with extra liabilities of over 7,000 crore.
This is bad news for the fund that is already in a mess with its poor track record of managing savings of employees efficiently. The EPFO wants to challenge the tax demand, saying retirement savings of employees are not taxable under the EPF Act. Sure, it has the right to move court over differences with the tax department. The income-tax rules for recognised provident funds (RPF) allow a tax break on withdrawals, but with three riders. One, the employee has to serve an organisation continuously for five years. Two, an employee’s services are terminated before five years for reasons beyond her control.
Three, when the accumulated balance in the employees account is transferred to any other RPF. Logically, therefore, premature withdrawals of an employee will be taxed if these conditions are not met. The tax dispute only compounds EPFO’s woes and a speedy resolution is a must. Fundamental reforms are needed to change the way the fund manages its corpus of 1,72,000 crore. The EPFO must improve record-keeping, accounting and diversify asset classes to maximise returns for workers.
Today, the EPFO has no system to track account-holders who have switched jobs. Its archaic records thwart seamless portability. This has hindered the I-T department from making a scientific assessment of premature EPFO payouts. It has assumed half the total EPFO payouts to people falls in the premature withdrawal category.
This is unscientific, but the blame lies with the EPFO. The New Pension System (NPS) that manages pensions of civil servants who joined on or after 2004, and of people who volunteer their savings, offers seamless portability with restrictions on withdrawals. Workers should be given the choice to move to the NPS that has the institutional framework to generate superior returns.