Sushil Jeetpuria

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Audit of Provident Fund Trusts By Ghulam
Ahmad Raza August 22,2009
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• 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
  employers 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 EDLIS1976.

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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

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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.

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Investment Pattern prescribed for Provident Fund
Trusts effective April 1, 2003
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• AUDIT OF PROVIDENT FUND TRUSTS
• Effective April 1, 2005, vide Circular no F.No.
  5(53)/2002-ECBPR
• 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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• AUDIT OF PROVIDENT FUND TRUSTS
• Meetings to be held once in a calendar quarter
• Section 17(1A)(d) of EPFMPAct, 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
• EPFMP Act
• IT Act

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AUDIT OF PROVIDENT FUND TRUSTSHealth of
Securities State wise exposure
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PSU exposure
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Sector wise exposure
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Redemption of Investments at maturity
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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

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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
•  

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• Thank you!