Epf (suman)

35
Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 1 Pioneer eServe Pvt Ltd Audit of Provident Fund Trusts By Sushil Kumar Jain, FCA ACS June 18, 2005

Transcript of Epf (suman)

Page 1: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 1

Pioneer eServe Pvt Ltd

Audit of Provident Fund

Trusts By

Sushil Kumar Jain, FCA ACS

June 18, 2005

Page 2: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 2

AUDIT OF PROVIDENT FUND TRUSTS

• Introduction• Formation of PF Trusts• Audit of PF Trusts• Recent Changes and Challenges

Page 3: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 3

Introduction

What is a Provident Fund ?

It is a mandatory, tax-qualified, defined, contribution retiral benefit plan wherein equal contribution

at the specified rateis made by the employer and the employee and the same is payable in lump sum on retirement.

Page 4: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 4

Introduction

Relevant Statutes are :

Employees Provident Fund & Miscellaneous Provisions

Act, 1952

Income Tax Act,1961

Provident Fund Act, 1925

Indian Trusts Act, 1882

Page 5: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 5

IntroductionFollowing 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

Page 6: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 6

Formation of PF Trusts

Options

Total Compliance with RPFCCovered Trust for All MembersExcluded Trust for Excluded Employees with Approval under Schedule IV part A of the Income Tax Act, 1961

Trusts for Both Covered and Excluded Employees

Page 7: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 7

Formation of PF TrustsDefinition :"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.

Page 8: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 8

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.

Page 9: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 9

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

Page 10: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 10

Formation of PF TrustsCoverage 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.

Page 11: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 11

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”

Page 12: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 12

Cost BenefitsCost BenefitsParticulars Un-exempted

Establisment (%)

Exempted Emp- loyees Trust

(%) Administration

Charges 1.10 Nil

Inspection charges

Nil 0.18

EDLI Charges 0.50 0.50

EDLI Administration

Charges

0.01 0.01

Total Cost 1.61 0.69

Page 13: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 13

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/-

Page 14: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 14

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.

Page 15: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 15

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

Page 16: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 16

AUDIT OF PROVIDENT FUND TRUSTSThe 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 Trustmay declare interest based on the earnings of the Trust.

Page 17: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 17

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

25%

15%

30%

30%

Central Govt

State Govt.

PSU

Flexible

Page 18: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 18

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.

Page 19: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 19

AUDIT OF PROVIDENT FUND TRUSTSProvided 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%

Page 20: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 20

AUDIT OF PROVIDENT FUND TRUSTS

Valuation of Securities & Amortisation of Premium :Guidelines in AS 13 cannot apply to PF Trusts

Cost Face ValueCost or Market Value whichever is lower

Amortise Premium but not discount

Page 21: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 21

AUDIT OF PROVIDENT FUND TRUSTS

Amortise Premium but not discount Income exempt

Hold till maturityTrade

Valued at lower of cost or market value

Page 22: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 22

AUDIT OF PROVIDENT FUND TRUSTSSettlements during the yearA 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.

Page 23: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 23

AUDIT OF PROVIDENT FUND TRUSTSIf 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.

Page 24: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 24

AUDIT OF PROVIDENT FUND TRUSTSTDS 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

Page 25: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 25

AUDIT 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 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

Page 26: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 26

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 :(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

Page 27: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 27

AUDIT OF PROVIDENT FUND TRUSTS

Submission of Returns

EPF&MP Act

IT Act

Page 28: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 28

AUDIT OF PROVIDENT FUND TRUSTSHealth of Securities State wise exposure

12.3020.51

82.93

010

20

30

40

50

60

70

80

90

Rup

ees

in L

acs

Rajasth

an

Karna

taka

Andh

ra Pra

desh

States

Page 29: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 29

PSU exposure

0

20

40

60

80

100

120

140

160

Rup

ees

in L

acs

BM AB IF IC SS HD

Public Sector Units

Page 30: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 30

271.50

87.8661.37

10.25

050

100150200250300

Rup

ees

in L

acs

Finan

cePo

wer

Irriga

tion

Housin

gRupees in Lacs

Sector

Sector wise exposure

Page 31: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 31

Redemption of Investments at maturity

140.00

20.56

213.41

22.06

81.44

65.40

105.28

45.14

0.87

0

50

100

150

200

250

Ru

pee

s in

Lac

s

1 Y

EA

R

2 Y

EA

RS

3 Y

EA

RS

7 Y

EA

RS

8 Y

EA

RS

10

YE

AR

S

11

YE

AR

S

15

YE

AR

S

24

YE

AR

S

Period of redemption

Page 32: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 32

Rating Profile Analysis

87.86

40.86

20.51

83.80

7.00

190.95

263.18

0

50

100

150

200

250

300A

mou

nt

in L

ac R

s.

A A- A+ AAA ASO UNRATED SOV

Rating

Page 33: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 33

Recent Changes …..and Challenges

Auditors change in two years Investment Pattern opened up Rate of Interest Accounting Standards Valuation of Investments FBT – SAF

Page 34: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 34

AUDIT OF PROVIDENT FUND TRUSTS

Anamolies :

No authentic data available,however,

Rs 1,40,000 crore with RPFCRs 1,40,000 crore in private trusts

Page 35: Epf (suman)

Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 35

Thank you!