Recently the PPF closure rules got changed and now a PPF account can be closed prematurely after 5 yrs itself, but only in some conditions which we will see in this article.
Till now, as per the old rules, the PPF account had a lock-in period of 15 yrs, and in no case, it was possible to close the account other than the death of the subscriber itself.
So death was the only valid reason to close the PPF account before 15 yrs maturity period.
PPF premature closure rules
As per the recent rule change by the govt, PPF closure before 15 years is now possible. You can close a PPF account if it’s at least 5 yrs old, in following 3 cases
Case #1 – Death
If the PPF holder dies, then the account can be closed anytime (even before 5 yrs) and the nominee/legal heirs can claim the amount from Govt.
Case #2 – Life-Threatening illness
The PPF account can also be closed in case, the money is required for curing the serious ailment or life-threatening disease of the following people
PPF subscriber himself/herself
Spouse
Dependent Children
Dependent Parents
Note that one has to provide the documentary evidence from a competent medical authority. So you will need to share the proof that you need to undergo some big treatment/surgery etc and you will need money for that.
Case #3 – Higher Education
If money is required for the higher education for the PPF subscriber or the minor on whose name the account is opened, then one can pre-close the PPF account. However one has to produce the fee bills and the proof of admission or any other documentary evidence.
Here are the exact notification wordings
Penalty of 1% when you close PPF account before maturity
This pre-close feature comes with a penalty of 1% of interest for each year. What it means is that for all the years since your PPF account is opened, you will get 1% less interest for each year. So if you earned 8.7% for a particular year, your calculation will be done @7.7% and this way for each period 1% will be reduced.
Govt has issued an example calculation for penalty of 1% . But the question now is does 1% penalty mean 1% less amount in final corpus after pre-closure?
No, the answer is 4.88 %!
Yes, You get 4.88% less corpus due to this pre-closure penalty of 1 %. But this is true for that example only which is given by govt in their notification. I went deeper and did the exact calculation and here are the results.
The reason why there is a good amount of difference is that there is the compounding of penalty in this example. If you check the balances in 3rd year, you will see there is difference of 2.1 %. And it keeps on increasing as the number of years increases.
Which means, Older the PPF account, the higher is the final penalty for you.
It does not make a lot of sense to close the PPF account before maturity once 10 yrs is passed, as the penalty will be higher than 4-5% if most of the cases.
PPF pre-closure rule will help investors
PPF is one of the widely popular financial products in India. Majority of families have at least one PPF account and given it’s a long term product, there is a good amount of money lying in it. Now with this new pre-closure rule, an investor gets the benefit of closing the PPF account if they want to do it.
But the only issue is that it’s not an emergency solution to the problem as the documentation requirement is there and being a govt product, you can expect a slow response while closing down the PPF account and using the money.
Please share what do you feel about this new change in PPF closure rules?
Good news, the inactive EPF accounts will now get interest from next month, i.e. Apr 1, 2016. Around 5 yrs back, under UPA rule, EPFO came up with the rule that any inoperative EPF account will stop getting interest after 3 yrs of inactivity.
So if a person left the job and never withdrew the money, he would stop getting the interest after 36 months. Inactive accounts are those accounts where there is no addition from employer or employee side. Now that old decision is reversed. There was a meeting of Central Board of Trustees at EPFO and this decision was taken.
A lot of employees will be happy due to this change because at a lot of people do not want to withdraw their EPF and still want to earn the interest. Also the withdrawal/transfer process is a bit cumbersome and many investors do not want to take the pain and let their accounts be there.
Inactive vs. Active EPF Account
As per a report, around 27,000 crore is lying in 40 million inactive EPF accounts (total accounts = 150 million), This money will now start earning interest.
That time many people were confused if the interest will be given to them or not if the accounts become inactive? Now that confusion is also cleared.
65% investment in G-Sec
As per this report, there is one more change in the way money will be invested by EPF in G-Secs
When asked about a proposal on enhancing proportion of incremental investments of the EPFO in government securities (G-Sec) from 50 per cent to 65 per cent, Labour Secretary Shankar Aggarwal said, “It has already been decided by the Ministry of Finance.”
The Secretary said that the limit of 50 percent was enhanced as they were getting good offers but unable to invest in such instruments as the limit had been exhausted.
“If we get higher returns in G-Secs then we should be allowed to invest more in these instruments,” he said further.
The government has cut the interest rate on Public Provident Fund from 8.7%to 8.1% effective April.
This was part of the interest rate cuts in the small saving schemes and apart from PPF, other very famous instruments like Kisan Vikas Patra, Senior Citizen Scheme & NSC interest rates have also come down by a good margin.
These new rates will be applicable from Apr 1st. Please note that this is one of the biggest rate cuts in the small saving schemes in a long time.
Here is a summary of all the rate cuts
Kisan Vikas Patra interest rates down from 8.7% to 7.8%
NSC interest rates down from 8.5% to 8.1%
Senior Citizen Saving Scheme interest down from 9.3% to 8.6%
5 yr NSC (National Saving Scheme) interest down from 8.5% to 8.1%
1 yr time post office deposits has been cut from 8.4% to 7.1%
2 yr time post office deposits has been cut from 8.4% to 7.2%
3 yr time post office deposits has been cut from 8.4% to 7.4%
5 yr time post office deposits has been cut from 8.5% to 7.9%
Postal saving deposits remain unchanged at 4%
Interest rates aligned with market rates
On Feb 16, 2016 (before the budget) itself the govt had announced that they are working towards bring the small saving interest rates closed to the market rates, but that time no changes were done in these schemes.
The government had on February 16 announced moving small saving interest rates closer to market rates. On that day, rates on short-term post office deposits was cut by 0.25 per cent but long-term instruments such as MIS, PPF, senior citizen and girl child schemes were left untouched.
Now the interest on these schemes is closer to the interest rates given by the banks.
I will leave the decision to conclude if this was a good or bad move by govt on you, however the common man is not very happy with this. Messages against this move are are all over the twitter.
What is your reaction to this?
Majority of investors in India invest in Public Providend Fund (PPF) scheme and it’s very close to their heart. However this move will make many people think if PPF is the best thing they can do with their money or not (learn how PPF interest rate is calculated).
Will they move to equity markets because of this move? Will it make them interested in other kind of financial products?
What do you think? Do you think of this big interest rate cut in PPF and other schemes? Please share your views in comments section.
Before I even start this article, please watch the first 5-6 min of the following video which comes from Ravish Kumar of NDTV and you will get the hottest points of discussion in this budget, which is taxation on EPF withdrawal.
The video below discusses various viewpoints from govt representatives, economists and some other people on why this is a foolish decision from govt and at the same time, why it makes sense to tax the EPF withdrawal. You will listen to the full video if possible for you, or else at least listen to the first half.
So, I was watching Budget 2016 yesterday and desperately waiting for the personal taxation announcement because that’s the main thing I understand :). By the end of the budget speech, it became clear that there were no changes in income tax slabs nor 80C limits and all hell broke loose on the news that the EPF withdrawal will be taxed on the 60% corpus.
The whole twitter and facebook was full of angry people showing their disappointment on the budget and how it has betrayed the salaried class. The issue went really out of hand and a twitter trend #RollBackEPF started trending and every person from across the country wanted it to be taken back. It was really a crazy day. And today govt has clarified that the tax is only applicable on the interest component only (more on that later in the article)
This budget’s major focus was on the rural economy and farmers which are neglected for decades anyways. Only time will tell if the efforts were taken in this budget work or not and if things improve and get better for farmers and rural economy. Let’s wait for that.
While there were many things in this budget, on the taxation front and other announcements, nothing major was there in this budget for a common man on taxation front and that made the salaried class very very disappointed.
Let’s look at the budget highlights one by one. My focus is to share all the major points which concern or are related to a common man.
1. No Changes in Tax Slab rates or 80C
Let me again share it. There was no change in the income tax slabs or the 80C limit. Everything remains the same on this front. Everyone was expecting that the slab will be raised or 80C limits will be increased, but that didn’t happen. There were conversations like the basic exemption limits should be raised to at least Rs 5 lacs from the current 2.5 lacs, and this was, in fact, Arun Jaitley’s demand in 2014 that the limits should be raised. Not sure what’s coming in his way now when he himself is the decision-maker.
2. Up to 40%, NPS withdrawal maturity becomes tax-free
Now 40% of the NPS corpus will be tax-free at the time of maturity, rest 60% corpus will be taxed if you withdraw it fully. However, if you buy an annuity (pension) from the remaining 60% corpus you won’t have to pay the tax. However, note that the pension amount which you will get will be normally taxes as the income in your hands.
This means that if you have Rs 1 crore in NPS at the time of maturity, if you withdraw the full amount, then 40 lacs will be tax-free, but the rest 60 lacs will be taxed. Now if the applicable tax at that time is 20% (just an example), then 12 lacs will go in tax and you will get the remaining 48 lacs in our hand. So a total of 88 lacs you will get out of 1 crore. However, you can choose to just take 40 lacs in hand and leave the 60 lacs in a pension product to generate the monthly income (which I think many will choose anyways).
One good point is that if the NPS holder dies, then the full death claim will be tax-free in the hand of the receiver.
3. EPF Interest becomes taxable for 60% corpus
As I said earlier, the EPF was the center point of discussion after the budget speech and govt has clarified that only the interest component will be taxed at the time of withdrawal and that too only on the 60% corpus. The 40% part will be tax-free fully. Note that this is applicable only on the interest earned after 1st Apr, 2016. The interest earned before this date will be tax-free.
Also, an important point here is that there is a lot of debate and confusion around this point as of now. We should wait for more clarification on this from govt in the coming days.
4. PPF remains tax-free (its still EEE)
PPF is untouched and still remains full tax-free as of now. Yesterday there was this confusion, that NPS, EPF and PPF, all of them are brought at the same level and many worried people whose PPF was going to mature in the coming months/years panicked and started asking if their PPF corpus will also get taxed.
So at this point of time, PPF remains the only investment product which comes under EEE (Exempt, Exempt, Exempt)
5. Employer contribution in EPF restricted to 1.5 Lacs per year
Now an employer contribution is EPF is restricted to Rs 1.5 lacs per year or 12% of the basic salary whichever is lower. Till now there was no limit like that, but with this budget that is changed. Incase employer does contribute more than 1.5 lacs per year, then it will taxable in employees hand.
Also, note that the govt will now contribute the 8.33% EPS part for the employees from its own pocket for the first 3 yrs for the new EPFO members.
6. Health Insurance of Rs 1 lacs for Senior Citizens
There will be a health insurance scheme launched soon which will provide Rs 1 lac of health cover to poor families. Also, the senior citizens who belong to these families will also get an additional Rs 30,000 top-up cover on top of Rs 1 lac. The govt budget documents give the reasoning for this scheme.
Catastrophic health events are the single most important cause of unforeseen out-of-pocket expenditure which pushes lakhs of households below the poverty line every year. Serious illness of family members cause severe stress on the financial circumstances of poor and economically weak families, shaking the foundation of their economic security
7. HRA exemption under Sec 80GG raised from 24k to 60k per year
As per sec 80GG, those who do not get HRA in their CTC from their employer can now claim up to Rs 60,000 per year as a deduction under rent paid. Earlier this was only Rs 2,000 per month. This will help a lot to those people whose employers are not giving them HRA Component. Rs 5,000 though is a less amount, but still a respectable deduction at least.
In other word eligibility will be least amount of the following :-
1) Rent paid minus 10 percent the adjusted total income.
2) Rs 5,000 per month. (this was Rs 2,000 earlier)
3) 25 percent of the total income.
8. First time home buyers to get extra Rs 50k deduction in Interest
The first time home buyers will get an additional Rs 50,000 tax exemption in interest part apart from the current exemption, provided following points are true
The loan amount should not be more than 35 lacs, and the value of the house should not be more than 50 lacs
The loan should be sanctioned between 1st April 2016 – 31st Mar 2017
The home buyer should not have any other residential house on his name
9. Dividends above Rs 10 lakh to attract an additional 10% tax
Now if a person is earning more than Rs 10 lacs of dividend from stocks will have to pay the tax of 10% on it. Right now companies anyways pay DDT (Dividend distribution tax) on the dividends declared. I think this is anyways going to impact only those who have very high investments in stocks and they earn big dividends. A normal investor will mostly be out of this.
10. Service tax increased from 14.5% to 15% due to Krishi Kalyan cess
A new cess called Krishi Kalyan cess of 0.5% is added to service tax, which is applicable to all taxable services, which simply means that the service tax has now gone up from 14.5% to 15%. While this 0.5% does not look much, its actually going to be a decent amount for a common man in addition to what we pay.
That means an extra Rs 2 in the bill if you have food worth Rs 1,000 in a restaurant.
That means an extra Rs 5 in your phone bill of Rs 1,000
I think it will add a few hundred extras in your expenses if you count entire years of expenses. This will be applicable from 1st June, 2016 so you still have some time 🙂
11. TDS of 1% on buying cars above Rs 10 lacs
1% TDS is proposed on the purchase of luxury segment cars costing Rs 10 lacs or more. The same TDS is also there if one buys any goods or services exceeding Rs 2 lakh. On top of this, an infrastructure cess of 1% is on small petrol cars, CNG cars and 2.5% cess on diesel cars are there, which means that cars, in general, become a bit expensive.
Even the branded clothes and tobacco items will become costlier due to the excise duty increase
12. Possession period for property raised to 5 years for claiming tax benefit
Earlier, if one used to buy/construct a property, one had to get the possession in 3 yrs itself to claim the tax benefits on the interest paid under sec 24. Now it has been raised to 5 yrs. This will help those real estate investors who have not got the possession due to delays from builders.
13. Tax Rebate of Rs 5,000 for those with income less than 5 lacs
For small tax payers with an income of fewer than 5 lacs, the tax rebate is increased from Rs 2,000 to Rs 5,000. This means that if the income tax payable is upto Rs 5,000 for small tax payers, they don’t have to pay it. Rs 5,000 will get deducted from the tax payable. So if a person is earning Rs 4 lacs (taxable income), then as per slab his income tax is Rs 15,000 (10% of the income above 2.5 lacs), out of this Rs 15,000 tax payable, he will get the rebate of Rs 5,000 and he will pay only Rs 10,000. This was earlier set at Rs 2,000 only, but now changed to Rs 5,000
14. ATM’s in Post offices
Over the next 3 yrs, govt plans to roll out the ATM’s in post offices so that more people in rural areas can access the banking services. The department of Posts plans to bring around 25,000 post offices under this in the next few years.
There are many more things in the budget, but I am not going into each of those. The points above are the main highlights which I am discussing here. You can read all the points of budget in this PDF file
Please share how do you rate this budget and what do you think about the move on the EPF taxation?
Indian Govt has brought a new amendment in the EPF rules, according to which the members will not be able to fully withdraw from their EPF before they reach the retirement age.
The maximum one will be able to take out is their own contribution and its interest (which was raised to 8.8% recently), and that can be done only after 2 months of ceasing employment.
The only exception shall be made for female members resigning for the purpose of marriage or pregnancy or child birth. I came across this news from Nitin Jain when we got an mail from his employer about this notification. Thanks for Nitin to send the notification PDF to me.
Below is the snapshot of the exact wordings taken from the notification which was released by the govt recently. please find out the PDF of the notification here
So whatever your employer is contributing to EPF and the interest on that part will be retained in EPF till the retirement age and you will be able to use it only at the end.
Many investors when they change jobs withdraw from their EPF’s and till now they used to get the full amount. But this is not going to happen from now onwards. What this means is that if you have an EPF account, your relationship with EPFO is lifelong now, because your account will be active till you retire (or die)
This is not a sudden decision taken. It was properly planned many months back itself and there was news about this restriction coming up in future, however that time, it was said to be the limit of around 75% of the total amount, but now it’s close to 50% only (employees share only).
Also note that as per the stats from EPFO; out of the 13 million annual claims pending with the EPFO, over 6.5 million claims are for 100% withdrawal, that’s 50%. This means that out of every 2 claims which EPFO gets for withdrawal, 1 of them is for full withdrawal.
This means that a big portion of claim withdrawal applications was coming from people wanting to withdraw the full amount. Now with this new rule, the number of applications to EPFO will also reduce drastically.
Is this new change in EPF withdrawal rules Good or bad?
From an employee’s point of view, the flexibility to withdraw the full amount (the painful process) has gone and now you can’t just take out full money like you used to do earlier. EPF is a social security measure, and was designed keeping that in mind, but people used to apply for withdrawal the moment they changed the jobs most of the times, now with this new change, it will not be possible and in reality one will be forced to keep a part of their wealth in EPF till their retirement
No matter how much I try to think like an employee, my experience of working with thousands of investors tells me that it’s a good move. PDF is the only saving at the moment, which happens by default for a salaried person, and even though one does not touch it for years, eventually a big percentage of the population always thinks of withdrawing the money on job change and the money gets utilized somewhere.
Retirement Age increased from 55 to 58
Another change in the notification is that the retirement age is increased from 55 yrs to 58 yrs, which means that one can now only consider themselves to be retirement from the EPF point of view once they turn 58 yrs. One can also apply for a pension only at that point in time.
This is a good move if you think long term. Consider a person who is 28 yrs old, and his salary is Rs 30,000 per month. Assume that his basic salary is 40% of the gross amount, which here comes to 12,000 per month. Now on this, he will get 12% of salary deducted as for the EPF and another 12% will be added from the employer which would total Rs 2,880 per month.
Now if the salary increment happens @7% per year and the return on EPF continues to be 8% per year, the person will retire with 80-90 lacs of EPF corpus at the time of retirement, provided he does not withdraw anything in between. However now even if the person chooses to withdraw the money in between, with this new rule the employer contribution is going to the restricted and one will bound to have 40-50 lacs at a time to retirement (with the assumptions above). Below is the chart which shows how the numbers move.
Note that the above chart is only for illustration purpose, The only point I want to make it a decent amount of money will be there at the time of retirement because of this new forced rule.
Please share what you think of this new rule. Do you think it’s good or not? How do you react to this?
Congratulations, Now you can now go and deposit the extra Rs 50,000 in your PPF account as the limit for your PPF investments was raised from Rs 1 lac per year to Rs 1.5 lacs in this budget.
A lot of investors had invested Rs 1 lac in their PPF account this year start and when the budget raised the limit by extra Rs 50,000 . They had this big question – “Can I invest Rs 50,000 more in my PPF account this year and get the income tax benefit?”
The thing is even if the budget has mentioned that PPF limit was raised, it does not get increased instantly. I mean the banks officials and post office staff does not allow the max limit the same moment. A separate notification is required by the RBI after making the required amendments in the Public Provident Fund scheme and that’s exactly what happened on 22nd Aug .
PUBLIC PROVIDENT FUND (AMENDMENT) SCHEME, 2014 – AMENDMENT IN PARAGRAPH 3 AND FORM-A
In exercise of the powers conferred by sub-section (4) of Section 3 of the Public Provident Fund Act, 1968 (23 of 1968), the Central Government hereby makes the following further amendments to the Public Provident Fund Scheme, 1968, namely :—
1. (1) This Scheme may be called the Public Provident Fund (Amendment) Scheme, 2014.
(2) It shall come into force from the date of its publication in the Official Gazette.
2. In the Public Provident Fund Scheme, 1968,—
(i) in paragraph 3, in sub-paragraph (1), for the letters and figures “Rs.1,00,000”, the letters and figures “Rs.1,50,000” shall be substituted;
(ii) In Form-A, in paragraph (iv), for the letters and figures “Rs.1,00,000”, the letters and figures “Rs.1,50,000” shall be substituted.
Below you can see the copy of the notification which came 1 day back and the same has been sent to all the banks and post office departments and RBI has asked them to now incorporate it and also inform to all the PPF subscribers.
How much extra income tax you will save by investing Rs 50,000 more in PPF ?
If you are into the highest bracket of 30% , in that case you will save 30% tax on the extra Rs.50,000 invested in PPF. So that comes to Rs.15,000.
Earlier you used to pay income tax on Rs.50,000 (because you had maxed out your investments in income tax saving products) , but now you will save 50,000 and also pay Rs.15,000 less in your income tax (because your taxable income will come down by 50,000)
So now you can visit your SBI Bank or Post office or any other bank where you have your PPF account and invest the extra Rs.50,000 🙂
In the last few days, there is news that some EPFO employees have done fraud and siphoned off Rs 21 crores from some EPF account.
How was this EPF fraud done?
So the fraud was done on those EPF accounts which belonged to small companies which are inactive from 2006 and there were some checks and balances which were not done for those old accounts. Another thing they did is that they only withdraw 2-3 lacs because it does not for any kind of audit (it happens above 5 lacs withdrawal).
This was done by few employees of the Mumbai office and one of the clerks was the mastermind for this. Around 8 people have been suspended already and it points out that a bigger fraud may be in place. More investigations are going on right now!
Apart from the above recent incident, I also want to share with you some more incidents which have happened in past.
I am going to share some startling facts today about EPF Frauds that have recently come to light and have been written about and highlighted in the press. And it is highly likely that some of you who are reading this article might be victims of this fraud – just that you are unaware of the fact at the moment.
Fraud Withdrawal’s from EPF accounts
Sanjay Kumar is the Chief Vigilance Officer at EPFO and on 7th Oct 2013, a circular was issued to all the EPFO establishments of all regions in the country with the subject- “Fraudulent withdrawal from the account of EPFO by furnished forged statutory returns”.
The letter talked about scammers making fraudulent withdrawals from various EPF accounts by submitting forged bank accounts and KYC details/documents. It also mentioned that EPF officials had colluded with these scammers and helped them withdraw money from Provident Fund accounts – especially ones that were inoperative (no activity on those accounts) and/or where the employer no longer existed (closed or shutdown).
I have paraphrased below important excerpts from the circular
Point 2. The investigation has revealed that the fraud was committed mainly in respect of those establishments where remittances had not been received for many years, records not updated and the establishment had not submitted statutory returns. Further no pre-coverage or post-coverage inspections were carried out of the firms and no claims were received or settled since long,” it said.
Point 3. The investigation has revealed that the fraudsters had submitted forged/fabricated returns viz . Form 3A/6A, 9(R), Specimen Signature Cards and therefore, Submitted fictitious claims in the name of original members of non-members. The claims were settled by putting pressure on dealing hands/office by all possible means.
You might be aware of multiple cases where investors face a slew of obstacles while withdrawing their Employee Provident Fund money. At times, it takes years before they get any status of their EPF money and even when a payout is made, cheques go missing or are sent to the wrong address. So, it doesn’t require much imagination to see how in the wrong hands the cheques can be cashed simply by opening a fake bank account.
Here is an incident where an EPF investor faced the issue
Preliminary investigations revealed that there had been huge withdrawals and transfers of money from the individual fund accounts of a number of school employees without their consent and knowledge,” they added. “An FIR was registered and investigations were initiated by a special investigation team. During the investigation, it came to light that funds were withdrawn by the treasurer of the school by forging signatures of the principal and staff members,” police said. (Source)
Some Numbers
To put things in context, we are not talking about a few isolated fraud cases or few crore rupees here. The actual scale of the fraud is mind-boggling and will cause you sleepless nights.
Consider this – as on April 2011, there were close to 8.15 crore EPF accounts, out of which 3.14 crores EPF accounts were dormant with a balance of close to 16,000 crore rupees. Of these 3.14 crore dormant accounts, 2.5 crore accounts had a negative balance, which meant that they did not have any money in them (money had been totally withdrawn!).
How does EPF Fraud work?
Let’s talk about the modus operandi of the fraudsters in detail, so that you can understand the loopholes in the EPFO system. Note that this whole fraud is highlighted mainly for dormant accounts, especially those where the employer does not exist now. However, it would not surprise me if frauds started to happen even on active accounts anytime soon.
So here are the steps that are taken by fraudsters
Step 1 – Identify a dormant EPF account
The first step is to find out all the details of the dormant EPF account. If you have some money to spend on bribes or lots of time and patience to search the Internet, you can get all the information you want. The Internet abounds with people who have given their EPF numbers, names and addresses without realizing the risk they are exposing themselves to.
Also if you have the money, you can quite easily bribe officials and get information. A dormant EPF account is one that does not get any fresh contributions for 36 months. At times the employer depositing the money in the EPF account closes operations and now the EPF account is totally orphaned and the money is sitting idle.
The EPF holder is either in another job waiting for that perfect moment when he will start the withdrawal or transfer process or he is working outside India and has totally forgotten to take action on his EPF account. It may also be that the money in the EPF account is such a trivial amount that he/she does not bother to do much about it.
Step 2 – Open a bank account with Forged details
The fraudster’s next step is to open a bank account with forged details and prepare a PAN card, address proof etc. In an environment, where obtaining fake passports or completely forged educational degrees is child’s play, it’s no stretch to assume that it would be easy to get fake KYC documents made.
Step 3 – Apply for Withdrawal of Claims with forged identity
After all the documents and identity are set, one just has to fill up a withdrawal claim while posing as the target of the intended fraud. If the company depositing the money in the EPF account is now non-existent, then EPFO relies on the bank branch to confirm the authenticity of the bank account (as per the Livemint article)
In any event, the structure of EPFO is not centralized i.e. each state has its own EPFO department and things are controlled locally. Therefore there are different EPF account numbers for the same person and different EPF accounts opened at different intervals. Even the process followed at each step is not extraordinary but rather the same old rotten way of doing things.
If there are issues at some stage, it has been found that insiders have been influenced and helped to pass the claims (as per the EPFO circular itself). There is no wonder that bribes are given and taken and things are bent. Here is proof below
The RTI reply also revealed that at least 1,350 EPFO employees have had corruption charges against them in the past five years. Of this, 450 are from the officer grade. Most of these officers have been accused of misusing power and colluding with companies to turn a blind eye to their wrongdoings. And every year, more and more such officers are coming under the scanner.
Confirming the trend, DL Sachdeva, a member of the EPFO board, said it would be next to impossible for any company to siphon off money without the help of EPFO officials. (Source)
What you should do now?
If you have an old EPF account that needs attention, you should ensure you withdraw the money or transfer it to your current EPF account. Make certain that you only have one single active EPF account running.
Do not leave it unattended for extended periods or else be ready to face unpleasant surprises in the future. If you need any information or need to move things forward, use the RTI application to the EPFO department and things will move quickly. Also, make sure you take general precautions like not revealing your EPF number and other details in public without a strong reason.
Please share your views on this topic and EPFO in general in the comments section below?
Starting July 1, 2013 , EPF account holders will be able to withdraw or transfer their EPF accounts from one employer to another employer online. EPFO has said that they are working on setting up a central clearance house which will be operational from July 1, 2013 . One of the major problems faced by employees is to transfer their EPF accounts from one company to another when they change their jobs or to withdraw their EPF accounts after leaving their job, which takes years and months, without them having any transparency in the system and process. They are frustrated, lost and have no idea where to ask for their EPF status and to whom . Because of this delay, a lot of people just let things go and the matter drags for years and years
You can also Track the Status Online
The best part is that you will be able to track your request online and will be able to see which stage your EPF withdrawal or transfer is ! .
Permanent EPF account number for each person
EPFO has earlier said that they are working on the permanent EPF account number where a employee once allotted a EPF account number will be able to use the same Employee provident fund number when he/she moves to another employer. The new employer will deposit the provident fund money in the same permanent account number. This will solve a lot of issues, but this would be possible only after 1-2 yrs , the first focus is on introducing a online withdrawal or transfer service.
Verification of Details after the request is put ?
Once you apply for withdrawal or transfer, the verification of all the details from employer will be done by EPFO . All you would have to do is just initiate the transfer or withdrawal request online (Its not clear how it will happen or what you need to exactly do). After that EPFO department will take charge and do their part of work by contacting the employer. Here is how the transfer would work
The member makes his transfer application at his new or old office or directly to the EPFO through an online application. The process is then taken over by the EPFO, which gets data verification from both offices and gets the transfer done immediately. Now, EPFO would do the work of getting details from both old and new offices where transfer is involved, says EPFO Commissioner Anil Swarup. – SOURCE
This will help 50 million Employee provident fund account holders , lot of paper work will be saved and surely the harassment will reduce . (Read how you can withdraw/transfer your EPF , if your employer is not supporting or helping you) . at this moment , a lot of withdrawal’s happen because employees know that its more easier and do not want to take chance for future issues due to the complex process. Hence this move will help a lot to EPFO department in retaining employees with their EPF’s .
What should you do right now ?
While the EPFO has said that this will be operational from July 1, 2013 , still there might be delays from their end (you know how deadlines work in real life , remember what happened with DTC (Direct Tax Code) ?) . If you can really afford to wait and want to try out this online system, then wait for 2-3 months and then give this a shot, else follow the usual process at this moment.
Conclusion
While its a welcome move and we should trust the EPFO department, still you know what happened with the EPF Online Passbook system by EPF , which is not up-to the mark and there are tons of issues with it. It might happen that this online EPF transfer and withdrawal system is built , but there can be huge disappointment with the way it would work . We can only wait and watch at this moment.
What do you feel about this move ? A lot of people might have faced bad experience while transferring and withdrawing their EPF accounts and would have wondered why dont EPFO makes every thing online. Now it comes !
Recently, SEBI has made some of the biggest changes in mutual fund regulations to revive the mutual fund industry. Some of the measures which are made are said to be helping AMCs and distributors more than investors. We will look at 6 major changes done in the meeting and the full detailed circular will come in few days.
1. Higher expense Ratio allowed
Do you know that close to 45% of mutual funds money comes just from Mumbai? Around 87% of AUM in mutual funds comes from top 15 cities in India, which means that only a minuscule 13% of the mutual funds money belongs to small cities in India. Penetration in other parts of country is very, very small and not encouraging. Now SEBI has proposed to increase the Expense ratio by 30 basis points (0.3%) if the mutual funds are able to increase their reach to smaller towns in India and increase their contribution to 30% . In short, if a mutual funds is able to get more than 30% of its AUM from other than top 15 cities in India, they can charge a 30 basis points expense ratio higher than its current expense ratio. Lower contribution means proportionately lower expense ratios.
The big effect, is that now there will be higher expense ratio for everyone. So inflow from smaller cities will affect investors from bigger cities. Investors from big cities will have to bear the burden of increased expense ratio.
2. No internal limits in Expense Ratio
A very big change which goes in favor of AMCs is the removal of internal limits on the expense ratio and for what it can be used. Earlier there was a limit on the AMC to charge up to 2.5% expense ratio (up to 100 crores AUM), but it was allowed to charge only 1.25% as Fund Management Charge and 0.5% as distribution charges. The rest was taken as their profits. So earlier suppose a Mutual Fund charged 2.25% as the expense ratio, then they compulsorily had to allocate 1.25% as Fund Management Charge and 0.5% for distribution.
But now, that sum limit has been removed and mutual funds are allowed to allocate expenses the way they want. This means you can now see more advertisements, more commissions to the distributors and more aggressive selling. While this is a very big change which will make AMCs happy, they will still have to keep a check on the expense ratio because of competition from other AMCs.
3. Putting Exit Loads back into the scheme
You must be wondering what happened to exit loads earlier, where did it go? When a investor got out of a mutual funds , he was charged an exit load if he quit before 1 year. That money was not transferred back to mutual fund, nor was it the profit of the mutual fund. It was actually transferred to a separate fund, which was used for sales, distribution and marketing. But now, when a investors exits prematurely, the entire exit load money will be credited back to the scheme account and will not be treated as AMC profit. However an equal amount (capped at 20 basis points) can be included in expense ratio back to compensate the AMC loss due to outgoing investors, which means that overall, for the investors on one hand, the AUM gets increased (NAV increased marginally because of exit load money coming back to them), while at the same time they’re paying more in expense ratios, so the net effect of this would be, no gain no loss to both the parties.
4. Direct Plans with lower expense ratio
SEBI has directed that for each mutual fund, there has to be a equivalent Direct Plan with a lower expense ratio. So for every mutual fund XYZ, now you will see XYZ and XYZ-Direct options. So XYZ will come with higher expense ratio, and XYZ-Direct will have lower expense ratio. Many people who research mutual funds and like to buy it on their own directly from AMC by passing agents and other online distributors, this option will be cheaper and makes sense. However, many distributors are not happy with this move and think this will “kill” their business, all because investors will then just invest into the direct options.
Note, SEBI has not yet clarified by how much lower, the expense ratio of the Direct plans will be and if it will be mandatory for each and every plan or just some categories. We’ll need to wait for the final circular, to find out.
5. Financial Advisers and Distributors separation
Very soon, financial advisor regulation will come into effect. This means, now there will be some minimum qualification, registration and guidelines for financial advisers. They will have to register with SEBI and a separate body of regulators will soon be created for this. A financial advisor is a professional who advises his clients on investments for a “fee.” The important distinction being, he wont be able to earn any money from commissions by selling financial products. If a person wants to sell financial products and earn commissions out of it, then he will not be able to “advise” the clients. But CA, MBA, and several other professionals are kept out of this rule and even mutual fund agents who have a valid ARN code are kept out of this rule because their basic advice is seen as the extention of their work. There is still more clarity required on this, so don’t conclude anything yet.
What does it mean finally ?
If you are wondering what it means overall in single sentence, then it means increased costs (expense ratio) and lower returns for investors, but it may not be that bad as you think. Dhirendra Kumar of Valueresearchonline feels that the expense ratio increase will be in range of 0.1% to 0.4% range.
All in all, investors could see a 0.1 to 0.4 per cent increase in the fee that they effectively pay to have their funds managed. Any increase ends up reducing the returns that funds generate but all in all, this has been a deftly managed round of reforms that could get a decent bang for the buck.
Lets see all the changes and what effect it had finally on different aspects
Criteria
Before
Now
Expense Ratio Charged
Maximum 2.5% allowed (depending on the AUM)
Now additional 30 basis points is allowed if the fresh inflow’s from smaller towns
Internal Limits on Expense Ratio
Internal Limits of 1.25% for Fund Management Charges, 0.5% for distribution costs
No internal limits now
Where did Exit Load go ?
Earliar it went to a seperate fund used for marketing and sales
Will be added back to Scheme AUM, but will not benefit investors because of equivalent increase in expense ratio (limited to 20 basis points)
Direct Scheme of Mutual Funds
Earliar there was no distinction between a investment made by agent or directly with AMC
A new category called “Direct” will be introduced which will have a lower expense ratio.
Service Tax
Borne by AMC
Borne by Investors
Distinction between Adviser and Distributor
There was no distinction earlier
The regulations are now coming in . Advisor and Distributer will be separated.
What do you think about these changes ? Which changes do you think are in favor of investors and which are against them. How will this affect your investments in mutual funds in coming months and years ? Are you happy about these changes ?
This is a little old news. RBI has finally abolished Prepayment charges or penalty on home loans with floating interest rates. Borrowers can now transfer to new lender which provides them less interest rates without paying any kind of charges or penalty. Damodaran Committee on customer service in banks, RBI) has been observed that banks have been unfair in asking for charges when home loan borrowers want to switch to some other lender with lesser interest rates. Now if you prepay the loan from your own sources or through another lender, you only pay the outstanding loan amount.
Here are the excerpts from the circular from RBI on abolition of fore-closure charges/pre-payment penalty
2. In this context, attention is invited to paragraphs 81 to 83 of the Monetary Policy Statement 2012-13 announced on April 17, 2012 with regard to home loans on floating interest rates. The Committee on Customer Service in Banks (Chairman: M. Damodaran) had observed that foreclosure charges levied by banks on prepayment of home loans are resented upon by home loan borrowers across the board especially since banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.
3. The removal of foreclosure charges/prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans. Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system. It has, therefore, been decided that banks will not be permitted to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis, with immediate effect.
Prepayment Charges removal will help !
This new rule will surely be taken in good spirit by borrowers and end the discrimination done by banks between old and new customers. This will also make sure that the interest rates become more competitive in the overall system.
Have you prepaid your home loan just some time back with charges ? Are you going to prepay the loan soon after this Prepayment Charges removal ? What are your thoughts about this new circular !
