Exempted PF Trust in India – Benefits and Comparison

What is PF Trust

A provident fund is a mandatory retirement management scheme that is made compulsory by the government to which both employees and employers contribute on a monthly basis. This fund is expected to financially support when the employees retire from active employment.

A Provident Fund (PF) Trust is created by an employer to manage the provident fund accounts of its employees. The PF Trust is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. This act mandates that every establishment employing 20 or more persons should contribute to the Employees’ Provident Fund (EPF).

An exempted PF Trust is a trust that has been granted an exemption by the Employees’ Provident Fund Organisation (EPFO) from contributing to the EPF. Such a trust is required to follow the rules and regulations set forth by the EPFO for managing the provident fund accounts of employees.

The main objective of a PF Trust or an exempted PF Trust is to provide financial security to employees after retirement. Employers contribute a certain percentage of the employee’s basic salary and dearness allowance to the PF account. The employee contributes an equal percentage of their salary also to the PF account. The money gets accumulated, along with the interest earned on it, in the account. The PF account belongs to the employee. However, withdrawal of the money is regulated and can only do so at the time of retirement, resignation, or termination of employment. There are other provisions like partial withdrawal or loan against the PF account, etc. with stringent conditions.

A board of trustees is constituted by drawing representatives of both employer and employees. This board is mandated to manage the trust.They do so by keeping track of the contributions, investing the funds and ensuring employees’ interests are always protected.

An exempted PF Trust is one that is allowed to be managed by the employer. The advantage of such an arrangement is that employers can employ a better strategy for investing the funds and thus potentially getting better returns than the ones managed by EPFO. Another advantage of exempted PF trust is that it can provide more flexible benefits to the employees in using their PF accumulated amount by allowing withdrawals or providing loans with more amicable terms.

List of major exempted companies in India

According to the EPFO website, as of Feb 2024, there are around 1,300 private Provident Fund (PF) Trusts in India.

The major companies that have established PF Trusts in India include large conglomerates and multinational corporations across various sectors such as IT, banking, manufacturing, and pharmaceuticals. Some of the major companies with PF Trusts in India are:

• Infosys Technologies Limited
• Tata Consultancy Services (TCS)
• Wipro Limited
• HDFC Bank Limited
• ICICI Bank Limited
• Larsen & Toubro Limited
• Reliance Industries Limited
• Hindustan Unilever Limited
• Bharat Petroleum Corporation Limited
• Mahindra & Mahindra Limited

What are the differences between EPF and PF trust

The main differences are:

Ownership and Management

EPF is a retirement support scheme managed by the EPFO under the 1952 Act of Employees’ Provident Fund and Miscellaneous Provisions. On the other hand, a PF Trust is created and managed by an employer to manage the provident fund accounts of its employees.

Investment Options

The EPFO invests the funds from the EPF in relatively safe instruments such as government bonds, securities, and other fixed-income instruments. They yield relatively low returns. Since it is run by a private employer, PF Trust has the flexibility to invest the funds in a wider range of investment options which can potentially yield higher returns such as equities, mutual funds, and other market-linked instruments. These higher returns also carry a higher risk.

Interest Rates

The interest rates on EPF deposits could generally be lower than those of PF Trust. This is because the interest rates are determined by the government for EPF while the trustees have greater flexibility to provide higher interests.

Contribution Limits

The government-managed EPF has an upper limit of 12% of the employee’s basic salary and dearness allowance with a matching contribution from the employer. PF trusts do away with the upper limit for employees’ contributions. Employees can invest more in PF trust to gain better returns as well as prepare for their retirement. Employers too can choose to increase their contribution from more than 12% if they wish to do so with a view to attracting and retaining top talent.

Withdrawal and Loan Options

There are strict rules governing the withdrawal of amounts from government-managed EPF accounts. Partial withdrawals and loans against the deposits are provided with strict terms and conditions. PF Trusts can provide more flexibility as the rules are set by the trustees. Since the funds are for supporting employees when they retire, it requires prudence on the part of employees before utilising these funds for other purposes.

FactoHR’s provident fund trust software addresses pain areas that any PF trust administrator faces in managing trust activities. This software has features like investment management, financial accounting, employee self-service access, reporting tools, and reminders to help in the easy management of PF Trust for individual companies.

FactoHR also provides an administrative solution to manage your employees’ unexempted PF. Employees can conveniently use the provident trust module of the provident fund trust software for this purpose.

What are the advantages of PF Trust over EPF

The difference in flexibility and governing policies provide several advantages of a Provident Fund (PF) Trust over the Employees’ Provident Fund (EPF):

Flexibility in Investment

As the trustees have the freedom to choose from a wider range of investment options, PF Trust can exercise greater flexibility compared to the EPF. This allows them to potentially earn higher returns for the employees’ funds.

Higher Returns

Due to the flexibility of investment options, a PF Trust can potentially yield higher returns compared to the EPF. The interest rate on the EPF is set by the government and is typically lower than the market rate.

Customisation

A PF Trust can be customised to suit the specific needs of the employees and the employer. The trustees can design the fund management and investment strategy to align with the long-term goals of the organisation and its employees.

Greater Control

A PF Trust offers greater control to the employer over the management of the funds, as the trustees are appointed by the employer. This control results in the employer having more say in the matters of investment and management of the fund.

Flexibility in Withdrawals and Loans

Since the rules governing the PF Trust are governed by the trustees, they can offer flexibility in terms of withdrawals and loans. Employees appreciate this flexibility as they can access the funds in case of real financial needs.

Cost Savings

An exempted PF Trust can save the employer administrative costs, as they are not required to pay the administrative charges and fees levied by the EPFO for managing the EPF.

Are there any drawbacks in PF trusts?

There are some drawbacks of a Provident Fund (PF) Trust that employers and employees should be aware of:

Increased Responsibility

Most freedoms come with responsibilities attached. An employer opting to manage the PF Trust invariably takes on the responsibility of managing the fund collected from the contributions made by employees and the employer. Managing the trust requires additional investment in terms of time and specialised finance knowledge.

Higher Risk

While a PF Trust offers greater investment flexibility, it also carries higher risk compared to the Employees’ Provident Fund (EPF). The trustees may make investment decisions that result in losses, which could negatively impact the employees’ retirement savings.

Compliance and Regulatory Issues

Managing a financial institution such as a PF Trust requires that the governing rules and regulations are strictly complied with. Failing which, the Employer can face penalties and legal issues.

Limited Availability

This is not a drawback of having a PF Trust per se. But, the rules allow that only organisations with 20 or more employees are eligible to establish a PF Trust. This immediately becomes out of reach for small businesses and startups.

Lack of Portability

Unlike the EPF, which is portable across employers, a PF Trust is not portable. An employee cannot transfer an existing PF Trust fund to a new employer’s trust when leaving the current organisation. Instead, they have to withdraw their funds, which can result in taxes and penalties.

Lack of Government Protection

The EPF is backed by the government, which provides a degree of protection to the employees’ funds. In contrast, a PF Trust is managed by the employer and is not backed by the government, which can be a concern for employees.

What are the steps involved in starting a PF trust

Starting a Provident Fund (PF) Trust involves several steps, which are as follows:

Eligibility

PF Trust can be established only by companies that have 20 or more employees. Other companies with fewer than 20 can enrol with the EPF scheme.

Trust Deed

The company needs to draft a trust deed that outlines the rules and regulations governing the PF Trust. The trust deed should include the purpose of the trust, the eligibility criteria for employees to participate, the contribution rates, the investment strategy, and the rules governing withdrawals and loans.

Trustees

Trustees need to be appointed by the company to manage the PF Trust. They can be internal or external to the company. Trustees are responsible for efficiently managing the fund and making investment decisions.

Registration

Under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, Employers should register their PF Trust with the Regional Provident Fund Commissioner (RPFC). The registration process involves submitting the trust deed, the list of trustees, and other relevant documents to the RPFC.

Bank Account

Once the registration process is complete, a bank account should be opened by the company in the name of the PF Trust. Contributions made by the employees and the employer should be deposited only into this account.

Compliance

Both the Trustees and the Company should comply with the governing laws and rules when managing the fund. Participating in regular financial audits, filing annual reports and returns and adhering to the investment guidelines helps the company to be compliant.

Employee Communication

The details of the PF Trust should be communicated to its employees, including the contribution rates, investment strategy, and rules governing withdrawals and loans.

Conclusion

Both EPF and a PF Trust or an exempted PF Trust are established with the aim of providing financial security to employees post their retirement. The main difference between the two, however, is that an exempted PF Trust has the exemption from contributing to the EPF and is governed by the EPFO’s rules and regulations for managing the fund by the trustees appointed by the company.

While both the EPF and a PF Trust are designed to provide financial security to employees after retirement, the important differences lie in the ownership and management of the funds, investment options, interest rates, contribution limits, and withdrawal and loan options. A PF Trust provides more flexibility and potential for higher returns, while the EPF is considered safer but offers lower returns.

A PF Trust offers several advantages over the EPF, including greater investment flexibility, higher returns, customisation, greater control, flexibility in withdrawals and loans, and cost savings. It should be noted that the flexibility and higher profit come with relatively higher risks compared to the EPF.

Running a financial trust requires compliance with the laws and financial acumen. Hence, it is advisable that companies employ legal and financial experts to ensure that the PF Trust is established and managed efficiently and in compliance with governing laws and regulations.

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