Why in news?

The Employees’ Provident Fund Organisation (EPFO) is easing withdrawal rules but introducing a 25% minimum balance requirement to curb excessive withdrawals.

Data shows that nearly half of EPFO members have less than ₹20,000 in their accounts at final settlement. Frequent withdrawals during employment are eroding retirement savings, prompting the EPFO to act to preserve members’ long-term corpus.

What’s in Today’s Article?

• Growing Concern Over Small Retirement Corpus
• EPFO: Key Trends
• Impact on Pension Eligibility and Benefits
• New Withdrawal Norms and Minimum Balance Rule

Growing Concern Over Small Retirement Corpus

• The EPFO is introducing a 25% minimum balance requirement while liberalising withdrawals.
• A review of its data shows a worrying trend — nearly half of EPFO members have less than ₹20,000 in their accounts at the time of final settlement.
• This reflects how frequent withdrawals during employment are eroding long-term retirement savings.
• Surge in Withdrawals After Job Loss
  • About 95% of withdrawal claims are made immediately after unemployment, even though nearly half of these members rejoin the EPFO later.
  • This suggests that many employees use the EPF corpus as a short-term financial cushion, undermining its purpose as a retirement fund.

EPFO: Key Trends

• Low-Income Dominance in EPFO Membership
  • The EPFO’s data highlights the income profile of its members:
    • 65% contribute based on a monthly wage of ₹15,000 or less, the ceiling for mandatory EPF coverage.
    • The remaining 35% contribute voluntarily, earning above ₹15,000 per month.
  • This indicates that the majority of EPFO members belong to the lower-income formal workforce.
  • Overall, the organisation manages 30 crore accounts, with 7 crore active contributors and a corpus exceeding ₹26 lakh crore.
• Most Members Have Minimal Savings at Exit
  • The shortfall is widespread even at higher thresholds:
    • 75% of members have less than ₹50,000, and
    • 87% have under ₹1 lakh at final settlement.
  • This underscores how premature withdrawals prevent employees from building a meaningful retirement fund.
• Premature Settlements on the Rise
  • In 2024–25, out of 52.95 lakh final settlement claims, a massive 95% were premature withdrawals, made just two months after unemployment.
  • Of these, 24.21 lakh members (46%) rejoined establishments and resumed EPF contributions later.
  • Such repeated withdrawals and re-entries point to a pattern of financial insecurity and limited social safety nets among formal workers.
• Partial Withdrawals Surge
  • Since 2017, the EPFO has relaxed withdrawal rules, allowing auto-processed claims and no document proof for advances.
  • This has led to a surge in partial withdrawals, especially for illness, housing, and special circumstances.

Impact on Pension Eligibility and Benefits

• Most premature withdrawals by members cited unemployment under para 69(2) of the EPF Scheme, 1952, which allows full withdrawal after two months of job loss.
• Frequent or premature final settlements break EPF membership continuity, harming long-term benefits under the Employees’ Pension Scheme (EPS), 1995.
• Such breaks lead to:
  • Ineligibility for family pension in case of death.
  • Lower pension payouts at retirement or superannuation.
    • To qualify for pension, a member must complete at least 10 years of pensionable service.

New Withdrawal Norms and Minimum Balance Rule

• To streamline and discourage excessive withdrawals, EPFO has reduced withdrawal categories from 13 to 3:
  • Essential Needs – illness, education, marriage.
  • Housing Needs.
  • Special Circumstances.
• Key changes include:
  • Introduction of a 25% minimum balance requirement.
  • Increased withdrawal frequency for education (10 times) and marriage (5 times).
  • Up to 3 illness-related and 2 special-circumstance withdrawals per financial year.
• Backlash and Government Clarification
  • The changes drew criticism from opposition leaders and EPF members.
  • They argued that workers were being denied access to their own savings, calling it “a subsidy at the cost of the middle class.”
  • Following the backlash, the Labour Ministry clarified:
    • Members can still withdraw 75% of their corpus immediately after job loss.
    • The remaining 25% must stay as minimum balance, but full withdrawal is allowed after 12 months of unemployment.
• EPFO’s Concern: Long-Term Pension Security
  • Officials defend the changes, saying frequent withdrawals hurt members’ pension prospects and undermine retirement security.
  • They emphasised that premature withdrawals reduce future pension benefits, warning that India’s ageing population will depend heavily on their own contributions for financial stability.