New Delhi: The government is expected to save at least Rs300 crore each year by deciding to close 30 million inoperative Employees’ Provident Fund (EPF) accounts. That’s the amount the government spent on maintaining and managing the accounts in which no contribution had been made for the past three years.
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No interest will be credited to the EPF accounts after they are inoperative for three years, the government said on 15 September, when it also announced a 1 percentage point interest rate hike on EPF accounts to 9.5% for the fiscal ending 31 March.
Officials say the decision to close the accounts, which contained a total of Rs15,415 crore, was dictated partly by the need to save on the cost of administering them and partly because a bulk of the money in the risk-free accounts belonged to a relatively small group of people who had been earning interest of 8.5% by maintaining them.
“EPF is tax-free and there is no question of tax being deducted at source (TDS) as it happens in other vehicles of investment like bank fixed deposits,” said a senior labour and employment ministry official on condition of anonymity.
“The volatility of investing in equities is also not here. Hence, a small segment of these account holders with a large chunk of money are not taking away the capital to earn a better return,” the official added.
Once interest payments on the inoperative accounts stop, those who hold substantial sums in them will pull out the money and invest in other vehicles, such as bank fixed deposits, on which they would be liable to pay TDS, said the official.
“Here they have to pay TDS over the earnings and the revenue will go to the government. At a minimum of 10% TDS, the revenue could go up by few hundred crores,” he added.
Over 15 million EPF accounts inoperative for the last three years had less than Rs1,000 each, of which at least 3.3 million accounts contained less than Rs100 each.
“At least 92% of the total accounts hold about 35% of the total amount—each case has less than Rs10,000,” the official cited above said. “This means only 8% of the total accounts hold 65% of over Rs15,415 crore in operative account corpus.”
“These are mostly residual balances pending mainly because of calculation mistakes coupled with interest earned over years. The actual contribution amount could be as low as Rs25-30. The efforts to identify such account holders and pay back the amount would be more costly than the pending amount,” the official added.
Central provident fund commissioner S. Chatterjee said people should take out their money after retirement or after they stop contributing to their EPF accounts.
“The EPF is a social security system for employees and not an investment or banking option,” he said.