EPFO Circular on utilization of reserves and surplus By Exempted Provident Fund Trusts

Overview:

In a significant move aimed at ensuring compliance and equitable treatment among beneficiaries, Employees’ Provident Fund Organization (EPFO) has issued a circular dated 07 October 2024, addressing the utilization of reserves and surplus for crediting interest to Trust beneficiaries.
The circular advises that upon the cancellation or surrender of exemption for Exempted Provident Fund (PF) Trusts, all accumulated funds, including undistributed interest on investments, must be transferred to the EPFO. Additionally, a compliance audit will be conducted to identify any instances of non-compliance or improper use of reserves and surplus.

Circular Update:

This circular has been issued by the EPFO Head Office in response to observed cases where exempted establishments requested authorization to use the reserves and surpluses held in Provident Fund Trusts. They aimed to credit interest to current beneficiaries at rates significantly higher than those set by the EPFO, particularly during or just before the process of surrendering exemption and transitioning to the EPFO. The circular outlines that the EPFO has carefully evaluated the situation and its legal implications, establishing the following key principles:

1. An inflated surplus in the Balance Sheet of the Trust suggests that the earnings from previous years have not been distributed fairly among the current beneficiaries. This implies that the higher earnings in previous years should have been distributed as higher interest for the beneficiaries.
2. Interest is to be credited in the beneficiary accounts on monthly running balance basis with effect from the last day in each year; thus no interest is allowed to be credited for the broken periods of a year.
3. The rate of interest allowed to the beneficiaries of the Exempted Trusts in any particular should be commensurate with the earnings of the Fund.
4. Overdrawal of reserves and surplus is not permitted at any point of time.

In addition to establishing these principles, the notification mandates that any requests for inappropriate distribution of surplus must be reported during compliance audits. It also emphasizes that all accumulations, including undistributed interest, should be transferred to the EPFO, upon cancellation or surrender of exemption.

The legal considerations regarding the use of reserves and surplus for crediting higher Interest rates are clear and stringent. Such practices are illegal under Para 60 of the EPF Scheme and violate the provisions of Indian Trusts Act. This circular supersedes previous circulars dated October 20, 2010, and March 17, 2011.

Vanshdeep Singh, Audit Associate, SW India