Audit of Provident Fund Trusts

By

Sushil Kumar Jain, June 18, 2005

FCA ACS

Pioneer eServe Pvt Ltd
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 1

AUDIT OF PROVIDENT FUND TRUSTS • Introduction • Formation of PF Trusts • Audit of PF Trusts • Recent Changes and Challenges

Sushil Jeetpuria & Co

Pioneer eServe Pvt Ltd

2

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.

Sushil Jeetpuria & Co

Pioneer eServe Pvt Ltd

3

1961 Fund Act. 1952  Income Tax Act.Introduction Relevant Statutes are :  Employees Provident Fund & Miscellaneous Provisions Act. 1925  Provident  Indian Trusts Act. 1882 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 4 .

1976 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 5 . 1952 . 1995 with effect from 16th November.Introduction Following three Schemes framed under the EPF & MP Act. 1952:  Employees’ Provident Fund Scheme.came into force from 1st March 1971 Later replaced by Employees’ Pension Scheme. 1976 . 1971 . 1952  Employees’ Family Pension Scheme. 1995  Employees’ Deposit Linked Insurance Scheme.came into force from 1st November.came into force from 1st August.

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 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 6 .

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 7 .per month. i His pay at the relevant time is more than Rs 6500/. whichever is later. ii He does not have any current PF Balance. 1952 or at the time of his joining the services of the Company.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.

withdrawls before completion of 5 years of membership.  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%. which does not come under the purview of the PF Department. 1961. but its policies are framed based on the PF Act. 88 rebate / 80C Deduction Interest on Employer and Employee contributions are tax free However. The regulatory Statute is the Income Tax Act. become taxable in year of withdrawal with condtitions.  Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 8 .Formation of PF Trusts An Excluded Employees' Trust is one. Employer contribution above 12% is taxable in hands of employees Employee Contributions eligible for Sec.

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 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 9 .Formation of PF Trusts Apart from the financial benefits.

the employers are required to file the particulars in the specified format for registration and allotment of business number.  Co-operative Societies.  Since the Act applies on its own force to the establishments.Formation of PF Trusts Coverage  Establishments employing 20 or more persons and engaged in any of the 177 industries / Businesses specified.  An establishment continues to be covered under the Act.  Establishments not coverable statutorily can opt for coverage. employing 50 or more persons & working without the aid of power. irrespective of fall in the employment strength. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 10 .

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” Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 11 .

10 Nil Exempted Employees Trust (%) Nil 0.61 0.01 1.01 0.69 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 12 .Cost Benefits Particulars Un-exempted Establisment (%) Administration Charges Inspection charges EDLI Charges EDLI Administration Charges Total Cost 1.50 0.50 0.18 0.

This is capped at Rs.Formation of PF Trusts  EPS deduction.33% can be made only from the employer's contribution of 12% of Basic and DA.6500/-   Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 13 . The EPS deduction of 8. to be paid to the RPFC cannot be made from the Employee's contribution.

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 14 . 8.  Employer is also required to pay a contribution of 0.  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.33% is to be remitted towards pension fund. beedi. dearness allowance.5% of the emoluments towards EDLIS’1976. guar gum factories. jute. coir industry other than spinning sector.  Establishments declared as sick undertakings by BIFR.AUDIT OF PROVIDENT FUND TRUSTS Contributions:  Statutory rate of contribution is 12% of emoluments (basic wages.) in the case of 177 establishments.  Rate of contribution shall be 10% in case of the following: Brick. cash value of food concession and retaining allowances if any.

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 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 15 .

In case of a shortfall. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 16 .5% p.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. 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. the Company has to make good the deficit.a. An Excluded Employees' Trust / Private Trust may declare interest based on the earnings of the Trust. However.

2003 25% 30% Central Govt State Govt.Investment Pattern prescribed for Provident Fund Trusts effective April 1. PSU Flexible 15% 30% Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 17 .

2005 The Trustees. may. 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.No.AUDIT OF PROVIDENT FUND TRUSTS Effective April 1. 2005. 5(53)/2002-ECB&PR Dated: January 24. vide Circular no F. subject to their assessment of the risk-return prospects. divide the total portfolio under Central and State Government categories into tradable and nontradable categories. if they so decide. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 18 .

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% Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 19 . shall be valued at Net Asset Value at the close of the financial year.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.

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 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 20 .

AUDIT OF PROVIDENT FUND TRUSTS Amortise Premium but not discount Income exempt Hold till maturity Trade Valued at lower of cost or market value Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 21 .

that is.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. and he joins one that does not participate in the EPF scheme. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 22 .  He immigrates or takes up employment abroad. He can withdraw up to 90 per cent of the amount in his credit in the year before he retires -.the scheme distinguishes between partial and total disabilities.  The organisation he works for shuts down.  He chooses to terminate his service under a voluntary retirement scheme. This could be either mental or physical. between the ages of 57 and 58.  His services are terminated because of retrenchment in the company.  The establishment he works for shuts down.  He retires – god forbid – because of permanent and total debilitation. but must be ‘permanent and total’ -.

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. settlements can be done immediately  Settlements are immediate in case of female members who resign from the services for the purpose of getting married. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 23 .  Settlement can be done only after a waiting period of two months from the date of resignation  For members going abroad.

1925 applies) is exempt.(i. is also exempt. 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). 1968 has been notified for this purpose. The Public Provident Fund(PPF) established under the PPF Scheme. to which the Provident Fund Act.e.AUDIT OF PROVIDENT FUND TRUSTS TDS on settlements      Any payment received from a Statutory Provident Fund. Any payment from any other provident fund notified by the Central Govt. the member is liable for deduction of tax Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 24 . 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. Besides the above. Otherwise.

Loans are to be utilized for purpose else provision to add back to income Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 25 .  To finance the treatment or hospitalisation of self or any member of the family. or to build or buy a house. 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.  To buy land.  To repay any loans that he has taken to buy or build a house.  To finance the weddings or college expenses of his children.AUDIT OF PROVIDENT FUND TRUSTS Advances / Loans from provident fund corpus:  To buy life insurance policies.  In special cases.

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 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 26 .AUDIT OF PROVIDENT FUND TRUSTS Meetings : to be held once in a calendar quarter Section 17(1A)(d) of EPF&MPAct.

AUDIT OF PROVIDENT FUND TRUSTS Submission of Returns  EPF&MP  IT Act Act Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 27 .

30 n th a 20.51 a ta k ja s na Ka r Ra States Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 28 An d hr a Pr a de sh .93 60 50 40 30 20 10 0 12.AUDIT OF PROVIDENT FUND TRUSTS Health of Securities State wise exposure 90 80 70 Rupees in Lacs 82.

PSU exposure 160 140 120 Rupees in Lacs 100 80 60 40 20 0 Public Sector Units Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 29 HD BM AB IC IF SS .

Sector wise exposure Rupees in Lacs 300 250 200 150 100 50 0 271.25 Rupees in Lacs Ho us in g Fi na Sector Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd Ir r ig a 30 .86 Po w er tio n nc e 10.37 87.50 61.

28 81.44 65.40 45.87 2 YEARS 3 YEARS 7 YEARS 8 YEARS 10 YEARS 11 YEARS 15 YEARS Period of redemption Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 31 24 YEARS 1 YEAR 0 .Redemption of Investments at maturity 250 213.14 100 50 20.41 200 140.56 22.06 0.00 Rupees in Lacs 150 105.

18 250 190.95 200 Amount in Lac Rs.86 100 40. 150 87.00 0 A AA+ AAA ASO UNRATED SOV 83.86 50 20.51 7.Rating Profile Analysis 300 263.80 Rating Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 32 .

Recent Changes …. and Challenges  Auditors change in two years  Investment Pattern opened up  Rate of Interest  Accounting Standards  Valuation of Investments  FBT – SAF Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 33 ..

000 crore in private trusts Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 34 .000 crore with RPFC Rs 1. Rs 1.40.AUDIT OF PROVIDENT FUND TRUSTS Anamolies : No authentic data available.40. however.

Thank you! Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 35 .

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