Audit of

Provident Fund
Trusts
By
Sushil Kumar Jain, FCA ACS

June 18, 2005

Pioneer eServe Pvt Ltd

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 AUDIT OF PROVIDENT FUND TRUSTS
 

• Introduction
• Formation of PF Trusts
• Audit of PF Trusts
• Recent Changes and Challenges

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 Introduction

What is a Provident Fund ?

It is a mandatory, tax-qualified, defined,

contribution retiral benefit plan
wherein equal contribution
at the specified rate
is made by the employer and the employee
and the same is payable in lump sum on
retirement.

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Introduction
Relevant Statutes are :

 Employees Provident Fund & Miscellaneous Provisions

Act, 1952
 Income Tax Act,1961
 Provident Fund Act, 1925
 Indian Trusts Act, 1882

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Introduction
Following three Schemes framed under the EPF & MP Act, 1952:
 Employees’ Provident Fund Scheme, 1952
- came into force from 1st November, 1952
 Employees’ Family Pension Scheme, 1971
- came into force from 1st March 1971
Later replaced by Employees’ Pension Scheme, 1995
with effect from 16th November, 1995
 Employees’ Deposit Linked Insurance Scheme, 1976
- came into force from 1st August, 1976

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Formation of PF Trusts
Options

 Total Compliance with RPFC

 Covered Trust for All Members
 Excluded Trust for Excluded Employees
with Approval under Schedule IV part A
of the Income Tax Act, 1961
 Trusts for Both Covered and Excluded Employees

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Formation of PF Trusts
Definition :
"Excluded Employee"
an employee of the Company
to whom both of the following two conditions apply
at the time of the coverage of the Company under the
Employees' Provident Funds & Miscellaneous Provisions Act, 1952
or at the time of his joining the services of the Company,
whichever is later.
 
i  His pay at the relevant time is more than Rs 6500/- per month.

ii He does not have any current PF Balance. 

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Formation of PF Trusts
An Excluded Employees' Trust is one,
which does not come under the purview of the PF Department,
but its policies are framed based on the PF Act.
The regulatory Statute is the Income Tax Act, 1961.
 The rate of contribution by the member can be any amount not
exceeding his basic salary including DA (if any)
 The employer can decide to contribute any amount up to 12%.
Employer contribution above 12% is taxable in hands of employees
 Employee Contributions eligible for Sec. 88 rebate / 80C
Deduction Interest on Employer and Employee contributions are
tax free
 However, withdrawls before completion of 5 years of
membership, become taxable in year of withdrawal with
condtitions.

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 Formation of PF Trusts
Apart from the financial benefits, some very important
benefits become available to employees who are
members of voluntary PF Trusts in comparison to the
unexempted establishments :

• Easy Availability of advances

• No hassles of Dealing with Public Departments
• Availability of Refundable advances
• Faster transfer of accumulations for outgoing
members
• Faster settlement of final dues

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Formation of PF Trusts
Coverage
 Establishments employing 20 or more persons and engaged in any
of the 177 industries / Businesses specified.
 Co-operative Societies, employing 50 or more persons & working
without the aid of power.
 Establishments not coverable statutorily can opt for coverage.
 An establishment continues to be covered under the Act,
irrespective of fall in the employment strength.
 Since the Act applies on its own force to the establishments, the
employers are required to file the particulars in the specified format
for registration and allotment of business number.

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Formation of PF Trusts

When can a company opt to set up an Exempted Trust ?

 Covered under the provisions of the PF &MP Act, 1952
 Profit making Company
 20 employees
 Pass a Board Resolution
 File for exemption with the RPFC
 Apply to the CIT for recognition of PF Trust
 On receipt of the approval from RPFC the Trust can
comply as “Exempt”

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 Cost Benefits
Particulars Un-exempted Exempted Emp-
Establisment loyees Trust
(%) (%)
Administration 1.10 Nil
Charges
Inspection Nil 0.18
charges

EDLI Charges 0.50 0.50

EDLI 0.01 0.01
Administration
Charges
Total Cost 1.61 0.69

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 Formation of PF Trusts

 EPS deduction, to be paid to the RPFC cannot be made

from the Employee's contribution.

 The EPS deduction of 8.33% can be made only from

the employer's contribution of 12% of Basic and DA.

 This is capped at Rs.6500/-

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AUDIT OF PROVIDENT FUND TRUSTS

Contributions:
 Statutory rate of contribution is 12% of emoluments
(basic wages, dearness allowance, cash value of food concession and
retaining allowances if any,) in the case of 177 establishments.
 Rate of contribution shall be 10% in case of the following:
Brick, beedi, jute, guar gum factories, coir industry other than
spinning  sector.
 Establishments declared as sick undertakings by BIFR.
 Matching contribution is to be collected from the employees
 Out of 12% (or 10% as the case may be) of the employer’s share of
contribution, 8.33% is to be remitted towards pension fund.
 Employer is also required to pay a contribution of 0.5% of the
emoluments towards EDLIS’1976.
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 AUDIT OF PROVIDENT FUND TRUSTS

Specifics :
• Interest Payment
• Investment Pattern
• Valuation of Securities & Amortisation of Premium
• Settlements during the year
• Advances / Loans
• Meetings
• Submission of Returns
• Health of Securities

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AUDIT OF PROVIDENT FUND TRUSTS
The Rate of Interest declared by EPFO
for FY 2003-04 and FY 2004-05
on PF contributions is 9.5% p.a.

An Exempted Trust cannot credit interest

less than the statutory rate of interest stipulated
even if the Trust is not able to earn the minimum interest.

In case of a shortfall, the Company has to make good the deficit.

However, An Excluded Employees' Trust / Private Trust

may declare interest based on the earnings of the Trust.

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Investment Pattern prescribed for Provident
Fund Trusts effective
April 1, 2003

25%
30%

Central Govt
State Govt.
PSU
Flexible

15%

30%

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AUDIT OF PROVIDENT FUND TRUSTS

Effective April 1, 2005, vide Circular no F.No. 5(53)/2002-ECB&PR

Dated: January 24, 2005

The Trustees, subject to their assessment of the risk-return

prospects, may, if they so decide, divide the total portfolio under
Central and State Government categories into tradable and non-
tradable categories.

Upto 10% of the total portfolio at the end of the preceding financial
year can be treated as tradable and may be used for active
management.

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AUDIT OF PROVIDENT FUND TRUSTS
Provided that the tradable portfolio of Government securities shall
be marked to market and mutual funds, which have been set up as
dedicated funds for investment in Government securities, shall be
valued at Net Asset Value at the close of the financial year.

Flexible portion being 30% may be invested in any of the three

categories as decided by their Trustees

Investment may be made in Shares of companies that have an

investment grade debt rating from at least two credit rating
agencies 5%

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AUDIT OF PROVIDENT FUND TRUSTS

Valuation of Securities & Amortisation of Premium :

Guidelines in AS 13 cannot apply to PF Trusts

  Cost
Face Value
Cost or Market Value whichever is lower

Amortise Premium but not discount

 

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AUDIT OF PROVIDENT FUND TRUSTS

Amortise Premium but not discount

 
Income exempt
  Hold till maturity
Trade

Valued at lower of cost or market value

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AUDIT OF PROVIDENT FUND TRUSTS
Settlements during the year
A member may completely withdraw the amount that has accrued in his
account if:
 He retires at the age of 58.
 He retires – god forbid – because of permanent and total debilitation.
This could be either mental or physical, but must be ‘permanent and
total’ -- the scheme distinguishes between partial and total disabilities.
 He immigrates or takes up employment abroad.
 His services are terminated because of retrenchment in the company.
 He chooses to terminate his service under a voluntary retirement
scheme.
 The establishment he works for shuts down.
 The organisation he works for shuts down, and he joins one that does
not participate in the EPF scheme.
He can withdraw up to 90 per cent of the amount in his credit in the year
before he retires -- that is, between the ages of 57 and 58.

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AUDIT OF PROVIDENT FUND TRUSTS
If an employee brings in a transfer from another approved
Provident Fund Trust or RPFC
 then the service rendered with such an ex-employer is
counted.
 Settlement can be done only after a waiting period of two
months from the date of resignation
 For members going abroad, settlements can be done
immediately
 Settlements are immediate in case of female members
who resign from the services for the purpose of getting
married.

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AUDIT OF PROVIDENT FUND TRUSTS
TDS on settlements
 Any payment received from a Statutory Provident Fund,(i.e. to which the
Provident Fund Act, 1925 applies) is exempt.
 Any payment from any other provident fund notified by the Central Govt.
is also exempt.
 The Public Provident Fund(PPF) established under the PPF Scheme,
1968 has been notified for this purpose.
 Besides the above, the accumulated balance due and becoming payable
to an employee participating in a Recognised Provident Fund is also
exempt to the extent provident in Rule 8 of Part A of the Fourth Schedule
of the Income Tax Act.
 There is no tax deduction if the member has put in five years of
continuous service with the employer (includes period of past
membership with previous employer/s if there is a transfer received).
Otherwise, the member is liable for deduction of tax

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AUDIT OF PROVIDENT FUND TRUSTS
Advances / Loans from provident fund corpus:
 To buy life insurance policies.
 To buy land, or to build or buy a house.
 To repay any loans that he has taken to buy or build a house.
 To finance the treatment or hospitalisation of self or any
member of the family.
 To finance the weddings or college expenses of his children.
 In special cases, where the establishment he works for is
temporarily shut down, or if his services have been
terminated and he has challenged that termination in court.
Loans are to be utilized for purpose else provision to add
back to income

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AUDIT OF PROVIDENT FUND TRUSTS

Meetings : to be held once in a calendar quarter

Section 17(1A)(d) of EPF&MPAct, 1952

The Board of Trustees constituted shall :

(i) maintain detailed accounts
(ii) submit returns to the RPFC
(iii) invest the provident fund monies
(iv) transfer provident fund account of any employee
(v) perform such other duties as may be specified

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AUDIT OF PROVIDENT FUND TRUSTS

Submission of Returns

 EPF&MP Act

 IT Act

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AUDIT OF PROVIDENT FUND TRUSTS
Health of Securities
State wise exposure

90
82.93
80
70
60
Rupees in Lacs

50
40
30
20
20.51
12.30
10
0

a
an

sh
k
ta

e
th

ad
na
s
ja

Pr
r
Ra

Ka

a
hr
d
States An

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PSU exposure

160

140

120

100
Rupees in Lacs

80

60

40

20

BM AB IF IC SS HD
Public Sector Units

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 Sector wise exposure

300
250
Rupees in Lacs

200
150
271.50
100 61.37
87.86 10.25
50
0 Rupees in Lacs

Sector

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Redemption of Investments at maturity

250
213.41

200

140.00
R u p ees i n L acs

150
105.28

81.44
100
65.40

45.14

50 20.56 22.06

0.87

10 YEAR S

24 YEAR S
11 YEAR S

15 YEAR S
2 YEAR S

3 YEAR S

7 YEAR S

8 YEAR S
1 YEAR

Period of redemption

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Rating Profile Analysis

300
263.18

250

190.95
Amount in Lac Rs.

200

150

87.86
83.80
100

40.86
50 20.51
7.00

0
A A- A+ AAA ASO UNRATED SOV
Rating

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Recent Changes …..
and Challenges

 Auditors change in two years

 Investment Pattern opened up
 Rate of Interest
 Accounting Standards
 Valuation of Investments
 FBT – SAF

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 AUDIT OF PROVIDENT FUND TRUSTS

Anamolies :

No authentic data available,

however,

Rs 1,40,000 crore with RPFC

Rs 1,40,000 crore in private trusts
 

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 Thank you!

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