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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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slide1

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

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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

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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.

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 3

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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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 4

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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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 5

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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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 6

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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. 

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 7

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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.

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 8

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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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 9

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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.

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 10

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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”

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 11

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Cost Benefits

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 12

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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/-

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 13

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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

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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.

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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 17

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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.

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 18

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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%

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 19

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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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 20

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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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 21

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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.

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 22

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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.

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 23

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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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 24

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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

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 25

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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 :

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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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

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PSU exposure

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 29

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Sector wise exposure

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 30

redemption of investments at maturity
Redemption of Investments at maturity

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 31

rating profile analysis
Rating Profile Analysis

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 32

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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

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Thank you!

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 35

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