Exempted PF Trusts: EPFO Mulls Over Imposing 2% Interest Cap And Risk-Based Audit

The Employees’ Provident Fund Organisation (EPFO) is set to overhaul a regulatory framework for the private provident fund trusts. The organisation is transitioning from the mandatory annual audits to a risk-based system. Under the new protocol, EPFO plans to prioritise auditing of the high-risk non-compliant establishments, whereas the compliant entities will benefit from reduced administrative burden. The compliant entities would not need to undergo audits every year unnecessarily.

EPFO plans to put a cap on the interest rate offered to the employees by exempted provident funds, according to an official, reported the Economic Times. Under the revised Standard Operating Procedures (SOPs), private trusts would be restricted from declaring interest rates more than two percentage points higher than the annual rate officially announced by the EPFO. The rule is designed to ensure financial stability and prevent disproportionately high returns, as in some incidents seen where smaller trusts have offered interest as high as 34 per cent.

Reportedly, these changes are aimed at balancing strict regulatory compliance and promoting ease of doing business, for around 1200 large companies and public sector undertakings (PSU) holding exempt status for their provident fund trust.

In February this year, the Exempted Establishment Committee (EEC) of the EPFO proposed changes in the SOP and sent them to the Central Board of Trustees (CBT) for final approval. One of the changes proposed then was a shift from a physical audit to an online audit for the exempted organisation. Also, EEC proposed a risk-based audit to promote automation and reduce the audit time and compliance burden of exempted organisations.

What Is An Exempted Establishment?

The companies that manage the provident funds of their employees themselves are called exempted organisations. To create their own private provident fund trust, they need to take approval under Section 17 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

Employers in this case collect the fund from the employee and manage the fund; however, they have to get their records audited every year as a regulatory requirement of the EPFO.

As per the guidelines, they have to offer at least the same benefits as EPFO offers. The new norms allow establishments to retain their exempted status during mergers and acquisitions. In case an organisation wants to surrender its exemption, it can do so. As per the SOP revision proposal, they would need to issue a public notice regarding this in newspapers. In case an account becomes inoperative, they would need to transfer the balance in such accounts to the EPFO.

The revised SOPs are expected to be notified soon.

As of August 7, 2024, there were over 1250 exempted establishments.