By Rupin Chopra and Shantam Sharma
The Employees’ Provident Fund (EPF) is a cornerstone of the social security scheme established under the Employees’ Provident Funds and Miscellaneous Provisions Act, 19521 . This scheme plays a vital role in securing the financial future of the salaried class in India. Managed by the Employees’ Provident Fund Organization (EPFO), EPF accounts are mandatory for employees earning up to ₹15,000 a month in establishments with over 20 workers. Under this scheme, both the employee and the employer contribute 12% of the employee’s monthly salary (comprising basic wages plus dearness allowance); of the employer’s share, 8.33% is allocated to the Employees Pension Scheme (EPS). The EPF interest rate is declared annually by the EPFO. However, one contentious issue regarding EPF interest arises when accounts become inoperative.
Interest on Inoperative Accounts
The issue of interest on inoperative accounts stems from Paragraph 72(6) of the EPF Scheme, 19522 (“Scheme”), which classifies an account as inoperative3 . These accounts have typically lain dormant for various reasons, leaving the funds in a state of limbo. Situations that lead to an account being classified as inoperative are:
1. Member Has Not Withdrawn Money within 36 months after retirement or migrated abroad: One common scenario that results in an inoperative account is when a member retires from their job or permanently moves abroad but does not withdraw the EPF balance within 36 months. The funds remain untouched, and the account becomes inactive.
Example: Mr. Sharma retired from his previous company in 2020 but did not withdraw his EPF balance. Hence, In 2023, his EPF account was classified as inoperative.
2. Member Has Died, But the Claim Has Not Been Filed or Settled within 36 months of his death: In unfortunate cases where a member passes away, but no claim has been filed or settled within 36 months of the member’s death, the account is categorised as inoperative.
Example: Priya’s husband passed away after joining a new company, and she did not file a claim for his EPF balance within 36 months of his death. His account, thus, becomes inoperative.
3. Amount Remitted to a Person Has Been Undelivered or Not Claimed Back: Sometimes, the EPF funds sent to a member may remain undelivered or unclaimed. In such cases, the account turns inoperative until the issue is resolved.
Example: Mr. Singh’s EPF funds were undelivered due to want of latest address, and he never received them. His account is marked as inoperative.
4. Employer Has Not Made Any Contribution to the Account (for 36 Months): When an employer ceases contributions to an employee’s EPF account for an extended period, typically 36 months, the account can be considered inoperative.
Example: Mr. Khan’s company stopped contributing to her EPF account for three years due to financial difficulties. Her account becomes inoperative.
Inoperative accounts represent a unique challenge within the EPF framework. They often raise questions about the payment of interest and the accessibility of funds for members. Before the 2011 amendment4 to the Scheme, there was no statutory embargo on payment of interest on inoperative accounts. But, after the 2011 amendment, Paragraph 60(6)5 was introduced that imposed an embargo on interest payments on inoperative accounts.
However, the 2016 amendment6 to the scheme introduced significant changes in Paragraph 72(6) of the scheme which dealt with the definition of inoperative accounts. The words “ceased to be employed” were replaced with “retired from service after attaining the age of 55 years or migrated abroad permanently.”
|Pre-2016 Amendment||Post-2016 Amendment|
|(6) Any amount becoming due to a member as a result of: (i) supplementary contribution from the employer in respect of leave wages, arrears of pay, instalment of arrears 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 (ii) accumulation in respect of any member who has either [ceased to be employed or transfer, as the case may be] or died, but no claim has been preferred within a period of three years from the date it becomes payable, or if any amount remitted to a person is received back undelivered, and it is not claimed again within a period of three years from the date it becomes payable shall be transferred to an account to be called the [“Inoperative Account”]||(6) Any amount becoming due to a member as a result of: (i) supplementary contribution from the employer in respect of leave wages, arrears of pay, instalment of arrears 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 (ii) 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 claim has been preferred within a period of three years from the date it becomes payable, or if any amount remitted to a person is received back undelivered, and it is not claimed again within a period of three years from the date it becomes payable shall be transferred to an account to be called the [“Inoperative Account”]|
This meant that, post-2016, the cessation of employment became irrelevant for determining inoperability. Instead, the crucial factor became retirement after reaching the age of 55 years or permanent migration. The account would become inoperative after 36 months from the date of retirement or migration if no application for withdrawal was made during that time.
These two amendments raise a fundamental question: What is the extent of interest payment on inoperative accounts? Does a member who left the job before 2011 and claims interest after 2016 receive interest for the entire period from when the account became inoperative, or are they entitled to interest only until 2011 when the account initially became inoperative, based on the 2011 amendment?
Answering the Question
To address this confusion, several high courts, including the Hon’ble High Court of Madras, have taken up cases involving interest on inoperative accounts. The case of M.V.Ramakrishnan vs The Provident Fund Commissioner7 serves as a noteworthy example.
Mr. M V Ramakrishan worked at “Thermax Limited” from 1992 to 2006. He sought provident fund of Rs. 4,35,551 until March 2011, along with interest accrued on that amount. However, he was informed that he could not claim any interest beyond March 2011, as he left the company before April 2011. Dissatisfied with this decision, Mr. Ramakrishan filed a writ petition in 2017.
In response, the respondents argued that the amendment to Paragraph 72(6) in 2011 rendered Mr. Ramakrishan’s account inoperative as he ceased to be employed after July 2006, and he did not apply for withdrawal within 36 months of the amount becoming payable. According to the amendment, interest should not be credited to an inoperative account from the date it becomes inoperative. However, they also noted that another amendment in 2016 entitled Mr. Ramakrishan to interest, which was duly credited to his account.
The crux of the dispute was whether Mr. Ramakrishan was entitled to interest for the period between 2011-12 and 2016-17. Mr. Ramakrishan’s counsel argued that, since he had not retired after turning 55 and had no occasion to make a withdrawal, the respondents could not deny him interest for the mentioned period.
In contrast, the respondents relied on the amended Paragraph 72(6) of the Employees’ Provident Funds Scheme, 1952, stating that Mr. Ramakrishan was not entitled to interest from 2011-12 to 2016-17 because he ceased employment before the 2011 amendment and was not covered by the 2016 amendment.
The High Court’s decision in Mr. M V Ramakrishan’s case highlights the importance of legal clarity in matters related to interest on inoperative PF accounts. In this instance, the Court determined that Mr. Ramakrishan was not entitled to interest for the period from 2011-12 to 2016-17, as he fell under the purview of the 2011 amendment, which barred interest on inoperative accounts.
The amendments made to Paragraph 72(6) in 2011 and 2016 created a situation where members like Mr. Ramakrishan, who left their jobs before 2011 but sought interest after 2016, faced uncertainty and potential disputes. The High Court’s decision, thus, brought much needed clarity with regards to interpreting the law on interest paid to inoperative PF accounts, ensuring that employees receive their rightful due, ultimately serving the broader goal of social security and financial well-being for all.
1 Available at: https://www.epfindia.gov.in/site_docs/PDFs/Downloads_PDFs/EPFAct1952.pdf
2 Available at: https://www.epfindia.gov.in/site_docs/PDFs/Downloads_PDFs/EPFScheme.pdf
3 Paragraph 72(6) of EPF Scheme, 1952 Available at: https://www.epfindia.gov.in/site_docs/PDFs/Downloads_PDFs/EPFScheme.pdf
4 Subs. by G.S.R. 25(E), dated 15th January, 2011 (w.e.f. 1-4-2011)
5 (6) 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.
6 Notification for amendment to para 72 (6) of EPF Scheme, 1952 (inoperative accounts) – 11.11.2016 Available at: https://labour.gov.in/sites/default/files/11.11.2016_notification_for_amendment_to_para_72_6_of_epf_scheme_1952_inoperative_accounts.pdf
7 W.P.No.29166 of 2017