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When does your Provident fund become inoperative?

When does your Provident fund become inoperative?

Two years ago, Sameer got an exciting opportunity and he switched job. While joining the new company, he was asked to share his previous PF account number so that same could be transferred or else open a new PF account with new employer. Sameer envisaged some funds requirement near the year end, so he decided to use the existing PF and open a new PF account. Few months later, he realized he forgot to withdraw previous PF balance. He later came to know that the account has become inoperative!

To his relief and of many more, whose EPF accounts have been labeled as “inoperative” that they even might not know, the story of inoperative accounts has changed altogether last year.  Here is the update.

Meaning of inoperative PF account

Usually, when we say inoperative, people attach a common bank account notion that since there is no activity in it, it becomes inoperative. This is partially true in case of Employee PF accounts.

Let us first see what the law says.

Para 72(6) Employee Provident Fund Scheme 1952 defines an “Inoperative account” as follows:

“Any amount becoming due to a member as a result of:

  • supplementary contribution from the employer in respect of leave wages/arrears of pay, instalment of arrear contribution received in respect of a member whose claim has been settled on account but which could not be remitted for want of latest address, or
  • accumulation in respect of any member who has either retired from service after attaining age of fifty-five years or migrated abroad permanently or died but no application for withdrawal under paragraphs 69 or 70, as the case may be has been preferred within a period of thirty six months from the date it becomes payable,
    or
    if any amount remitted to a person, is received back undelivered, and is not claimed again within a period of thirty six months from the date it becomes payable,

shall be transferred to an account to be called the “Inoperative Account”.

Going by the definition, we conclude:

  • To deem an EPF account inoperative, following conditions must be fulfilled:
    1. There is no contribution for 36 months.
    2. There has not been any application for withdrawal of amount from the account.
  • Event to trigger withdrawal are:
    • retirement from service or
    • Permanent migration abroad or
    • death
  • Even if the person has claimed money within 36 months, the account may become inoperative if claims return undelivered and are not claimed within further 36 months of its date becoming payable.

Well, that is an updated version. That was not how inoperative PF accounts were before November 11, 2016. Earlier the triggering events were the cessation of employment and death. In case of cessation of employment, it was necessary that the employee does not take up another employment in a covered establishment within 2 months, to be eligible to withdraw the amount.

For more clarity, refer the following diagram:

diagram

So what’s the big deal if account turns inoperative?

Your answer lies in Section 60 of the Employee Provident Fund Scheme 1952. Para 60(6) of the scheme states that:

”Interest shall not be credited to the account of a member from the date on which it has become Inoperative Account, under the provisions of sub-paragraph (6) of paragraph 72.”

The loss of the interest is the biggest setback of the inoperative account. Prior to amendment in Section 72 as discussed above, the account could become inoperative if an employee takes up employment after 2 months in a new company and amount from previous EPF account was not withdrawn. Imagine the loss of interest which could not be earned till withdrawal from so-labeled inoperative accounts.

Thanks to the amendment that now those erstwhile inoperative accounts (other than death cases) will no longer be inoperative accounts and will earn interest prospectively.

Here it will be interesting to note that the new provisions do not apply to international workers. As per the current rules, an international worker (not covered under SSA) is eligible to withdraw from PF account on retirement after attaining the age of 58. The person may continue to earn interest on their accumulated balance in the provident fund for up to 36 months from the date they become eligible to withdraw the funds.

To take a “deep water dive” into the subject, refer our case based examples below to understand the above changes.

1. Aneesh is an employee of XYZ Ltd. On November 30, 2016, he retires from the company upon attaining age of 55 years. Aneesh however does not withdraw money from EPFO.

Our view

If Aneesh does not apply for withdrawal of money till November 30, 2019, his account will be deemed to be inoperative and he will no longer earn interest from that date.  

2. Aneesh is an employee of XYZ Ltd. On October 30, 2016, he retires from the company upon attaining age of 55 years. Aneesh however does not withdraw money from EPFO.

Our view

Retirement was not the triggering event before amendment. In that scenario, it will not be termed inoperative and will continue earning interest. Pursuant to amendment, if Aneesh does not apply for withdrawal of money till October 30, 2019, his account will be deemed to be inoperative and he will no longer earn interest from that date.

3. Aneesh is an employee of XYZ Ltd. The retirement age in XYZ Ltd is 60 years. Aneesh resigns on attaining age of 58 years.

Our view

Assuming that both Aneesh and XYZ Ltd. continue to contribute into the provident fund till Aneesh resigns, the account will not be treated inoperative once the age of 55 years is achieved.

4. Aneesh is an employee of XYZ Ltd. On November 30, 2016, he resigns from the company upon attaining age of 45 years. Aneesh however does not withdraw money from EPFO.

Our view

The account does not become operative as resignation takes place before attaining the age of 55 years. The account will continue to earn interest on the money lying with EPFO till the time, Aneesh dies or Aneesh migrated abroad permanently.

Even after death or permanent migration from India, the account will become inoperative only post 36 months.

5. Aneesh is an employee of XYZ Ltd. He dies at the age of 35 years on 30th November 2016. His relative however does not withdraw money from EPFO.

Our view

Aneesh account will be deemed to be inoperative if his relative does not apply for withdrawal of money till November 30, 2019. The account will not earn any interest post November 30, 2019 post its inoperative tag.

Hope you find the article useful. Pour in your comments and help us improve!!

Sources:

  1. Employees Provident Fund Scheme, 1952
  2. (Amendment Notification (Notification no G.S.R 1065 (E) dated 11 November 2016)

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