EPF is in urgent need of an overhaul for flexibility and portability

Employees must be allowed to pause or reduce ontributions, and the promised portability between EPF and NPS should be enabled

My friend Pranay (55) recently recounted an ordeal. Fifteen years ago, he was the chief executive officer (CEO) of a company that defaulted on Employee Provident Fund (EPF) contributions due to financial distress. As the designated “employer”, criminal proceedings were launched against him. The company later restructured and cleared all EPF dues with interest, and Pranay moved on. To his shock, he recently received a court summons related to the old case. With his former employer unwilling to defend him, he had to scramble for a stay order — a temporary relief before the case resurfaces. Long after the issue was resolved, the legal burden persists. The criminalisation of monetary default is justified by the belief that EPF secures extra benefits for employees from employers, necessitating strict regulation.

 

Ironically, employers do not incur additional expense due to EPF, as it is employees who ultimately bear the “cost”. For instance, if a company intends to pay an employee ₹15,000 per month, it must contribute ₹1,600 to EPF under existing rules. Consequently, the stated salary is reduced to ₹13,400 (₹15,000 minus ₹1,600). The employee must match this contribution, further lowering his take-home salary to ₹11,800 (₹13,400 minus ₹1,600). Although the employer’s total cost remains ₹15,000, the employee’s take-home pay is reduced, with the balance locked in EPF until retirement. If EPF did not exist, the employee would receive the entire ₹15,000 and retain the freedom to decide how much to save and where to invest. Instead, the rigid EPF system dictates investment patterns, restricts withdrawals, limits nominee choices (e.g., married women cannot nominate parents), and operates through a bureaucracy with no accountability.

 

Contrast this with the National Pension System (NPS) for corporate employees. NPS offers flexibility — participation is optional, contributions can be stopped or reduced anytime, and employees can pick from a menu of funds based on their risk appetite. It has transparent record-keeping, managed by a Central Recordkeeping Agency (CRA). While withdrawal restrictions apply due to tax incentives, NPS Tier II accounts—which do not get tax benefits—have no such limitations. There is no provision for criminal prosecution under NPS.

 

The EPF resembles a Chakravyuh — once inside, there is no exit. Although higher-paid employees (earning above ₹15,000 per month) can opt out when first entering the formal workforce, once enrolled, they cannot exit except by leaving the formal sector or upon death.

 

Take Kunal, a high-salaried professional earning over ₹1 crore. His employer contributed the maximum amount possible to EPF (with a matching contribution by Kunal) as well as NPS. However, the 2021 tax amendments capped employers’ tax-free contributions to ₹7.5 lakh, rendering excess employer contributions to EPF and NPS taxable. If permitted, Kunal would have redirected ₹7.5 lakh to NPS and stopped both his and his employer’s EPF contributions, taking the balance amount as regular pay. However, EPF’s rigidity in disallowing reduction or stoppage of contribution forced him to halt NPS contributions entirely, leaving him with a partially taxable EPF contribution.

 

Truth be told, EPF’s rigidity hampers employment growth, and adversely affects both employees and employers. It impounds a substantial portion of low-wage employees’ pay and has several rigidities for high-wage earners like Kunal. Investor-backed start-ups require robust board oversight during crises. But investor representatives and senior management personnel resign when defaults loom, to avoid criminal prosecution under various laws, including EPF.

 

The departure of experienced board members or senior employees like Pranay during critical periods heightens the likelihood of failure.

 

Even as the Ministry of Labour and Employment (which oversees EPF) and the Ministry of Finance (which oversees NPS) debate reforms, EPF needs urgent changes. The drive to decriminalise labour laws must be extended to EPF. Employees must be allowed to pause or reduce contributions, and the promised portability between EPF and NPS should be enabled. If true choice is introduced, employees—not bureaucrats—will decide how to secure their retirement.

 

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta