PFs seek ceiling on staff contribution

Employees putting more money to take advantage of higher returns

Provident funds (PFs) are in a bind as the accretion of funds has more than doubled in 2003-04 as employees are contributing more to PFs to take advantage of assured annual returns of 9.5 per cent. No other instrument in the country offers this kind of high assured returns.

Normally, in a voluntary (contributory) PF scheme, an employer contributes 12 per cent of the basic salary of an employee to the PF corpus, and by statute, the employee is required to contributed an identical sum at the very minimum.

However, employees are allowed to put in more than the minimum 12 per cent required, if they wish to, as the PF Act does not put any cap on employees' contribution.

Contribution to PFs is only through deductions from the payroll and cannot be from outside one's gross salary.

"The quantum of contribution to voluntary provident funds is almost equal to the employee contributing to the PF," said Amit Gopal, senior vice-president, India Life, which manages over 50 PFs with assets worth over Rs 500 crore.

Faced with a problem of plenty, PF trusts want the government to put a cap on employee contribution. Alternately, some are demanding the freedom to offer a differential rate of interest on the VPF, such that only the statutory minimum will qualify for the 9.5 per cent assured return and all incremental contributions will get a lower, market-determined rate.

There have also been cases where past employees are not withdrawing their funds from the PF trusts even after leaving their jobs or even leaving the country as the interest rate on PF is possibly the highest one can earn.

"As there is no cap on VPFs, many trusts have found additional contributions from employees by at least 10 per cent," said another PF manager. Many PFs of multinational companies have seen inflow of funds from employees having doubled, the source pointed out.

About 15 per cent of the funds lying with some PF trusts of MNC companies are from past employees who continue to reap the benefit of high rates of interest. On withdrawal, they will not be able to earn as much in any other debt instrument where the risk is zero as in the case of PF.