Provident fund is a very common retirement plan to benefit the employees,

which is contributory in nature and yields a feeling of participation in

employees. The Establishment settles the Provident Fund in form of Trust,

required to be registered with the concerned Sub-registrar for getting the

status of an independent Body. There are three types of Provident funds,

which are known as:

Statutory Provident Funds, which are set up under the Provident Fund Act,

1925 and is maintained by the Government, semi Government organizations,

local authorities and other such institutions. Payments from such funds does

not need recognitions from the Commissioner Inland Revenue and are

exempted from Income Tax.

Recognized Provident Fund, which is recognized by the Commissioner

Inland Revenue under the Sixth Schedule of Income Tax Ordinance, 2001.

This type of Provident Fund is maintained by private sector or organizations.

Payments from such Provident fund are exempted from Income Tax.

Unrecognized Provident Fund No exemptions are available but there is no

yearly taxability. Employer's contributions and interest thereon will be taxable

at the time of payments to the employees only.

The Trust is responsible for collection of contribution from employers and

employees on monthly basis and to invest the same in various permissible

schemes and securities.

The Provident fund is created by the employer in the form of irrevocable Trust,

with the name, reflecting the name of the Company and containing the term

Employees' Contributory Provident Fund. At least three to five trustees are

appointed for the management of the Trust who are named in the Trust Deed.

The Provident Fund Trust Rules are separately prepared / drafted. The Trust

Deed is written on the Stamp Paper. The Trust Deed and the Rules specify

the terms and conditions pertaining to responsibilities, duties, rights and the

liabilities of the company, employees, trustees, auditors, bankers, actuaries

etc.
The Trust Deed must broadly contain the information regarding administration

and management of the Fund. The eligibility of the membership and

companies roles and power in the administration of the fund should also be

given. Apart from it the contributions and investments of the fund's money
should also be mentioned. The distributions of the profit among members and

the terms regarding the dispute and arbitrations methods may be specified.

The Trust Deed should be registered with the Registrar of the Trust which is a

mandatory requirement. One trustee can be authorized to appear before the

Registrar and the copies of ID cards of all the trustees and 2 Passport sized

photographs of each trustee have to be filed before the Registrar along with

original Trust Deed and copy of the Rules. After its registration the Trust has

to get its National Tax Number and all the trustees have also to get their

NTNs.

After registration is done the application for tax exemption approval is to be

filed under Part I of the Sixth Schedule of the Income Tax Ordinance, 2001

before the Commissioner Inland Revenue. Tax exemption's approval is

granted for lifetime of the Provident Fund. The conditions for the approval are

also given in Part I of the Sixth Schedule of the Income Tax Ordinance, 2001.

The conditions for tax exemptions are that all the employees should be

employed in Pakistan or being employed by the resident employer. However,

the tax exemption's approval can be given to non-resident employer if the total

ratio of employees employed outside Pakistan is not more than 10%. The

contribution of employer shall not be more than the employee's contributions.

Profit is distributed at the year-end on the closing accumulated balance of the

employees. It is advisable that the calculation is based on the average

balance. The members of the Provident fund can have the facility of loan /

temporary withdrawal. They can also have the facility of permanent withdrawal

on certain grounds. Interest free loans can also be availed, however, they are

certain limits to loans as given in the Rules. The guidelines for Provident fund

and moneys are also given in the Rules.

Where the employer is not a company the employee's contributions only and

its interest shall be invested in the Securities according to the Section 20 of

the Trust Act, 1882, Post Office Savings, Bank Account, National Savings,

Federal Government Securities, deposits in NCB and NBP. Other

Government securities or in other established financial institutions. On the

contrary where the employer is a company, both employer and employee's

contributions and interest shall be invested in accordance with the provision of

Section 227 of the Companies Ordinance, 1984. Provident Fund investment

rules were issued in the year 1996 which specifies the discipline for

investment in the listed Securities. These Rules have been amended from

time to time specifically through SRO 261 of May 10, 2002. The Provident

fund Rules of 2005 were re-issued regarding investment of Provident funds

moneys. The Provident Fund Trust have to file its annual Tax Return each

year treating itself as a company.

ZA-LLP can help to write Trust Deed to create Provident Fund and Rules to

administer it. We can also get it registered and further apply for Tax

exemption.