Why Salaried Indians Feel Trapped By The New EPFO Withdrawal Rules?

There has been a lot of talk lately concerning the new regulations for withdrawing money from the EPFO. People think that the government is acting like a severe parent. Some others feel it's a much-needed correction to save folks from ruining their retirement. But before we start the discussion, let's find out what EPFO is and why it matters to practically every person in India who gets a salary.

What is EPFO, and why should you care?

If you have formal employment in India, 12% of your basic income is taken out of your pay every month and deposited into your Employee Provident Fund (EPF) account. Your boss also puts in the same amount. The Employees' Provident Fund Organisation (EPFO), a government agency, takes care of this money. It administers more than 29 crore active members.

This money produces interest at a rate of 8.25% right now, and it is supposed to help you when you retire. Sounds wonderful, doesn't it?

The premise is simple: a lot of people don't save enough on their own, so our system does it for you. It works like a net to keep you secure. That's a good thing in a country where most people don't have job stability or pensions.

So, what's different now?

Before, if you wanted to withdraw money from your EPF before you retired, you had to follow one of 13 different regulations. For example, you may do so for marriage, sickness, a home loan, or school. You had to meet certain requirements for each one, and you usually had to serve for 5 to 7 years to be eligible. It was hard to understand, and a lot of people's claims were turned down.

You could only take out your own contribution and interest, not the employer's part. That's no longer the case.

The revised guidelines put all the arguments into three groups:

• Basic or essential needs: Covers expenses related to things like marriage, education, and illness.
• Housing: For purchasing new houses, constructing current houses, or repaying home loans.
• Special Situations: For situations like unanticipated financial strain or natural disasters.

And here's the big change: you may now take out both your portion and your employer's part, plus interest. You also just need to have worked for 12 months to be eligible to make partial withdrawals.

Sounds like a good deal? It is, but only until you get to the following portion.

The 25% Lock-In Clause

The new regulation specifies that you can't touch 25% of your entire PF amount until you retire. You can't touch it, not even in an emergency or while you're out of work.
That implies that even while the other 75% is simpler to get to now, you can't get to a fourth of your own money, no matter what.

An employed member can access up to 100% of the eligible amount when they make a partial withdrawal for reasons such as housing, marriage, or education, but the withdrawal cannot result in the remaining balance falling below the 25% lock-in limit. Members can withdraw up to 75% of the entire EPF corpus if they do so after one month of unemployment, but not after two months or longer.

According to EPFO withdrawal regulations, members can withdraw the remaining 25% only after 1 year of unemployment. You will have to wait three years for your pension amount (EPS).

Why are they doing this?

The government says this is to stop individuals from taking out their savings too soon.
"And the issue is genuine. More than half of EPF participants retire with less than Rs 20,000 in their accounts.

About 75% of people take their pension out within four years of joining, which means they lose the entitlement to a lifetime pension (you need to work for 10 years to get that)," said Chakravarthy V., Cofounder & Executive Director, Prime Wealth Finserv Pvt Ltd.

"The government is worried that if people keep taking money out of their PF early, they won't have any money left when they are elderly. And in the end, taxpayers will have to pay for their support. This 25% lock-in is like a "protection rule" that makes you save for later," Chakravarthy V further added.

But why can't you choose if it's your money?

The EPF isn't a gift from the government. It's your salary, which has already been taxed and earned. But someone else is in charge of everything about it:

• You don't get to choose how much to save.
• You don't get to select where it goes.
• You can't get to it all the time.
• Without your permission, the rules might change.
• You make the money. But the system still has control.

But many who work in the private sector are trapped with EPFO, where even routine withdrawals feel like a conundrum. Anyone who has tried knows how bad it is: website breakdowns, KYC issues, claim delays, and no customer assistance. The government says it will resolve things in real time, but most people still have to cope with bad service and old systems.

And what happens to your money when it's locked?

This is the portion that most people don't think about. Your money isn't just sitting there while you wait. It goes to the EPFO.

• As of March 2024, EPFO had control over Rs 24.7 lakh crore:
• The government has put Rs 22.4 lakh crore into bonds.
• ETFs get Rs 2.3 lakh crore.

This money goes towards public works, such as roads, railroads, and more. In other words, the government is using your money as inexpensive, long-term capital while it is locked up.

That's a good move when it comes to budgeting your money. But for you, the worker, it seems like the system helps more than you do.

And don't forget the tax rule.

You get interest on your EPF funds; however, beginning FY2022, the interest on your contribution is tax-free only up to Rs 2.5 lakh a year (Rs 5 lakh if your employer doesn't contribute).

So, if you give more than that, you have to pay taxes on the excess interest. That's another blow to the idea that EPF is "safe" and "high-return."

Chakravarthy V says, "As more young people hear about mutual funds, index funds, NPS, and other choices, many are starting to wonder, "Why am I stuck with a system that doesn't even trust me with my own money?"

So what does all this imply for you?

These new restrictions make things simpler in the near term if you're young, changing jobs regularly, or are saving up for something major like a house or college. You can take out more money quickly.

But if you're older and counting on your PF funds to help you out, that 25% lock-in changes everything. It might make it harder for you to get to it without lowering your danger.

"When a system tells you how much to save, how long to wait, and how to spend your own money, it stops seeming like a way to save money and starts feeling like a tax you'll never get back," commented Chakravarthy V.

Final Thought!

The EPFO system was created to assist people in saving money for retirement. That intention still exists. But the strict restrictions, bad service, and lack of flexibility make many people feel like strangers on their own financial path.

Yes, savings are important. Yes, individuals often make unwise choices with their money. But treating every employee like they can't be trusted with their own money may not be the answer here.

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