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Audit of Provident Fund Trusts By Sushil Kumar Jain, FCA ACS June 18, 2005. Pioneer eServe Pvt Ltd. AUDIT OF PROVIDENT FUND TRUSTS Introduction Formation of PF Trusts Audit of PF Trusts Recent Changes and Challenges. Introduction What is a Provident Fund ?

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Pioneer eserve pvt ltd

Audit of

Provident Fund

Trusts

By

Sushil Kumar Jain, FCA ACS

June 18, 2005

Pioneer eServe Pvt Ltd

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 1


Pioneer eserve pvt ltd

  • 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

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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

  • Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 15


    Pioneer eserve pvt ltd

    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.

    Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 16


    Investment pattern prescribed for provident fund trusts effective april 1 2003

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

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    Pioneer eserve pvt ltd

    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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    Pioneer eserve pvt ltd

    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 :

    maintain detailed accounts

    submit returns to the RPFC

    invest the provident fund monies

    transfer provident fund account of any employee

    perform such other duties as may be specified

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    Pioneer eserve pvt ltd

    AUDIT OF PROVIDENT FUND TRUSTS

    Submission of Returns

    • EPF&MP Act

    • IT Act

    Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 27


    Audit of provident fund trusts health of securities state wise exposure

    AUDIT OF PROVIDENT FUND TRUSTSHealth of Securities State wise exposure

    Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 28


    Pioneer eserve pvt ltd

    PSU exposure

    Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 29


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    Sector wise exposure

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    Redemption of investments at maturity

    Redemption of Investments at maturity

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    Rating profile analysis

    Rating Profile Analysis

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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

    Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 33


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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

    Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 34


    Pioneer eserve pvt ltd

    Thank you!

    Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 35


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