Corporate India and multinational companies are seeking to discourage employees from putting more and more money in their provident fund accounts.
Many companies have found that about 20 per cent of the incremental PF corpus is on account of employees voluntarily parking their money there, over and above the 12 per cent of their salary that they mandatorily have to contribute to their PF account, a sum that's matched by employers.
Indeed, some companies are even thinking of shifting their PFs to the regional provident fund commission.
Further, since the finance minister announced in the Budget that all exemptions under section 88 of the Income Tax Act would go and only an overall deduction up to Rs 100,000 would be allowed, irrespective of the savings instruments involved, corporate India fears that employees will take advantage of the higher rate of return on PFs and invest the entire Rs 100,000 in their PF account.
This is because PF offers the highest rate of assured return (9.5 per cent) in the market. While companies do not need to match the additional contributions, they are facing the problem of having to shell out a return of 9.5 per cent even on the voluntary inflows.
"We are unable at meet the stipulated rate of return (of 9.5 per cent) with our current investment portfolio. To make matters worse, the corpus under the voluntary PF is growing and adding to our burden," said the PF trustee of an IT multinational, which has a 5-year old PF.
Its Rs 32-crore (Rs 320 million) fund today is able to make a return of just 7.75 per cent, against the stipulated 9.5 per cent return that has to be doled out to employees.
This means that the company has to shell out the difference.
Legally there is no way any provident fund, either of exempted companies or the Employees Provident Fund Organisation, can cap voluntary payments to the scheme. Employees can put their entire salaries in this scheme.
However, some multinationals are today not permitting employees to put beyond 12 per cent in the fund.
Other corporates, especially IT multinationals, have decided to tackle the issue by telling employees that the fund will be shifted to the RPFC.
The EPFO is known for its poor servicing. As more and more corporate entities are forced to dip into their own profit and loss account to make good the differential in return payout, many are building in this differential into their HR budgets, which takes into account the cost to company per employee.