Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 2AUDIT OF PROVIDENT FUND TRUSTS• Introduction• Formation of PF Trusts• Audit of PF Trusts• Recent Changes and Challenges
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 3IntroductionWhat is a Provident Fund ?It is a mandatory, tax-qualified, defined,contribution retiral benefit planwherein equal contributionat the specified rateis made by the employer and the employeeand the same is payable in lump sum onretirement.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 4IntroductionRelevant Statutes are : Employees Provident Fund & Miscellaneous ProvisionsAct, 1952 Income Tax Act,1961 Provident Fund Act, 1925 Indian Trusts Act, 1882
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 5IntroductionFollowing 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 1971Later replaced by Employees’ Pension Scheme, 1995with effect from 16th November, 1995 Employees’ Deposit Linked Insurance Scheme, 1976- came into force from 1st August, 1976
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 6Formation of PF TrustsOptions Total Compliance with RPFC Covered Trust for All Members Excluded Trust for Excluded Employeeswith Approval under Schedule IV part Aof the Income Tax Act, 1961 Trusts for Both Covered and Excluded Employees
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 7Formation of PF TrustsDefinition :"Excluded Employee"an employee of the Companyto whom both of the following two conditions applyat the time of the coverage of the Company under theEmployees Provident Funds & Miscellaneous Provisions Act, 1952or 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.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 8Formation of PF TrustsAn 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 notexceeding 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 / 80CDeduction Interest on Employer and Employee contributions aretax free However, withdrawls before completion of 5 years ofmembership, become taxable in year of withdrawal withcondtitions.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 9Formation of PF TrustsApart from the financial benefits, some very importantbenefits become available to employees who aremembers of voluntary PF Trusts in comparison to theunexempted establishments :• Easy Availability of advances• No hassles of Dealing with Public Departments• Availability of Refundable advances• Faster transfer of accumulations for outgoingmembers• Faster settlement of final dues
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 10Formation of PF TrustsCoverage Establishments employing 20 or more persons and engaged in anyof the 177 industries / Businesses specified. Co-operative Societies, employing 50 or more persons & workingwithout 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, theemployers are required to file the particulars in the specified formatfor registration and allotment of business number.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 11Formation of PF TrustsWhen 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 cancomply as “Exempt”
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 13Formation of PF Trusts EPS deduction, to be paid to the RPFC cannot be madefrom the Employees contribution. The EPS deduction of 8.33% can be made only fromthe employers contribution of 12% of Basic and DA. This is capped at Rs.6500/-
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 14AUDIT OF PROVIDENT FUND TRUSTSContributions: Statutory rate of contribution is 12% of emoluments(basic wages, dearness allowance, cash value of food concession andretaining 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 thanspinning 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 ofcontribution, 8.33% is to be remitted towards pension fund. Employer is also required to pay a contribution of 0.5% of theemoluments towards EDLIS’1976.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 15AUDIT OF PROVIDENT FUND TRUSTSSpecifics :• 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 16AUDIT OF PROVIDENT FUND TRUSTSThe Rate of Interest declared by EPFOfor FY 2003-04 and FY 2004-05on PF contributions is 9.5% p.a.An Exempted Trust cannot credit interestless than the statutory rate of interest stipulatedeven 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 Trustmay declare interest based on the earnings of the Trust.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 17Investment Pattern prescribed forProvident Fund Trusts effectiveApril 1, 200325%15%30%30%Central GovtState Govt.PSUFlexible
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 18AUDIT OF PROVIDENT FUND TRUSTSEffective April 1, 2005, vide Circular no F.No. 5(53)/2002-ECB&PRDated: January 24, 2005The Trustees, subject to their assessment of the risk-returnprospects, may, if they so decide, divide the total portfolio underCentral and State Government categories into tradable and non-tradable categories.Upto 10% of the total portfolio at the end of the preceding financialyear can be treated as tradable and may be used for activemanagement.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 19AUDIT OF PROVIDENT FUND TRUSTSProvided that the tradable portfolio of Government securities shallbe marked to market and mutual funds, which have been set up asdedicated funds for investment in Government securities, shall bevalued at Net Asset Value at the close of the financial year.Flexible portion being 30% may be invested in any of the threecategories as decided by their TrusteesInvestment may be made in Shares of companies that have aninvestment grade debt rating from at least two credit ratingagencies 5%
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 20AUDIT OF PROVIDENT FUND TRUSTSValuation of Securities & Amortisation of Premium :Guidelines in AS 13 cannot apply to PF TrustsCostFace ValueCost or Market Value whichever is lowerAmortise Premium but not discount
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 21AUDIT OF PROVIDENT FUND TRUSTSAmortise Premium but not discountIncome exemptHold till maturityTradeValued at lower of cost or market value
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 22AUDIT OF PROVIDENT FUND TRUSTSSettlements during the yearA member may completely withdraw the amount that has accrued in hisaccount 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 andtotal’ -- 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 retirementscheme. The establishment he works for shuts down. The organisation he works for shuts down, and he joins one that doesnot participate in the EPF scheme.He can withdraw up to 90 per cent of the amount in his credit in the yearbefore he retires -- that is, between the ages of 57 and 58.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 23AUDIT OF PROVIDENT FUND TRUSTSIf an employee brings in a transfer from another approvedProvident Fund Trust or RPFC then the service rendered with such an ex-employer iscounted. Settlement can be done only after a waiting period of twomonths from the date of resignation For members going abroad, settlements can be doneimmediately Settlements are immediate in case of female memberswho resign from the services for the purpose of gettingmarried.
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 24AUDIT OF PROVIDENT FUND TRUSTSTDS on settlements Any payment received from a Statutory Provident Fund,(i.e. to which theProvident 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 payableto an employee participating in a Recognised Provident Fund is alsoexempt to the extent provident in Rule 8 of Part A of the Fourth Scheduleof the Income Tax Act. There is no tax deduction if the member has put in five years ofcontinuous service with the employer (includes period of pastmembership with previous employer/s if there is a transfer received).Otherwise, the member is liable for deduction of tax
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 25AUDIT OF PROVIDENT FUND TRUSTSAdvances / 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 anymember of the family. To finance the weddings or college expenses of his children. In special cases, where the establishment he works for istemporarily shut down, or if his services have beenterminated and he has challenged that termination in court.Loans are to be utilized for purpose else provision to addback to income
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 26AUDIT OF PROVIDENT FUND TRUSTSMeetings : to be held once in a calendar quarterSection 17(1A)(d) of EPF&MPAct, 1952The 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 27AUDIT OF PROVIDENT FUND TRUSTSSubmission of Returns EPF&MP Act IT Act
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 28AUDIT OF PROVIDENT FUND TRUSTSHealth of SecuritiesState wise exposure12.3020.5182.930102030405060708090RupeesinLacsRajasthanKarnatakaAndhraPradeshStates
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 29PSU exposure020406080100120140160RupeesinLacsBMABIFICSSHDPublic Sector Units
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 30271.5087.8661.3710.25050100150200250300RupeesinLacsFinancePowerIrrigationHousingRupees in LacsSectorSector wise exposure
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 31Redemption of Investments at maturity140.0020.56213.4122.0681.4465.40105.2845.140.87050100150200250RupeesinLacs1YEAR2YEARS3YEARS7YEARS8YEARS10YEARS11YEARS15YEARS24YEARSPeriod of redemption
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 33Recent 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 34AUDIT OF PROVIDENT FUND TRUSTSAnamolies :No authentic data available,however,Rs 1,40,000 crore with RPFCRs 1,40,000 crore in private trusts