17 April 2018 EY PAS Alert Recent Provident Fund updates PAS Alerts cover significant tax and regulatory changes that affect Indian businesses. Our PAS alert is a summary of technical developments intended to keep you on top of the latest tax and regulatory issues. For more information, please contact your EY advisor. Executive summary This Alert summarizes the below updates with respect to Employees Provident Fund and related schemes in India: a. Increase in the minimum benefit under the Employees Deposit Linked Insurance Scheme, 1976 1 b. Change in the investment pattern for private provident fund trusts 2 c. Streamlining of the inspection procedure for defaulting employers 3 d. New facility to link Universal Account Number (UAN) and Aadhaar 4 In addition, as per the minutes 5 of the 220th Meeting of the Central Board of Trustees of the Employees Provident Fund Organization (EPFO), the following proposals were made: a. Amendment to the definition of basic wages under the Provident Fund law b. Reduction of Provident Fund administrative charges from 0.65% to 0.50% of employees monthly pay c. Interest rate of 8.55% for the financial year 2017-18 d. Reduction in the minimum number of employees for mandatory coverage under the Employees Provident Fund from 20 to 10 The above proposals will be effective once there is an official notification/circular from the Government of India/EPFO. 1 Circular dated 21 February 2018 2 Circular dated 23 February 2018 3 Circular dated 27 February 2018 4 Press release dated 27 February 2018 5 Minutes of the 220th Meeting of the Central Board of Trustees of the EPFO dated 21 February 2018
Page 2 Background In the past few weeks, the EPFO has made various changes to bring about ease of compliance and ease of governance and to provide better services to the employers and employees. EPFO vide its circular dated 27 February 2018 has reiterated its target for transformation of EPFO to an electronic paper less organization by 15 August 2018 and has proposed various administrative initiatives to achieve the target in time. The EPFO Head Office, through the above circular, has also advised Zonal and Regional Offices to: Take earnest action in achieving paper-free office as well as default-free EPFO system Focus on enrolment of employees to achieve the mandate of social security to all Key changes Increase in the minimum benefit under the Employees Deposit Linked Insurance Scheme, 1976 (EDLI Scheme) Under the EDLI Scheme, in case of an employee s death, lump-sum benefit is paid to the nominee of the employee. For each employee, the employer is required to contribute 0.5% of the Monthly Pay or INR 15,000 per month, whichever is lower to the EPFO. Accordingly, the maximum contribution towards EDLI is INR 75 (0.5% of INR 15,000) per month per employee. There is no contribution required under the EDLI Scheme from the employee. The formula to calculate the life insurance cover is as follows: A X B + C A = Average Monthly Pay of the employee for last 12 months B = 30 C = 50% of the average balance in the Provident Fund account during the last 12 months or during the period the employee was a member of Provident Fund, whichever is less subject to a ceiling of INR 150,000 The minimum life insurance cover was INR 150,000 and the maximum life insurance cover was INR 600,000. The EPFO vide its circular dated 21 February 2018 (notification dated 15 February 2018) has raised the minimum life insurance cover from INR 150,000 to INR 250,000. The minimum life insurance cover of INR 250,000 will be valid for two years from the date of notification (two years from 15 February 2018 i.e. till 15 February 2020). The maximum life insurance cover of INR 600,000 and the formula to calculate life insurance cover remains unchanged. Change in the investment pattern for private provident fund trusts Under the Provident Fund law, an employer, who is registered under the Provident Fund law, can either make monthly contributions to the scheme set up by the Government (via EPFO) or to a private provident fund trust set up by such employer. However, such private provident fund trust needs to comply with all the rules and regulations as applicable under the Provident Fund law. As per the Provident Fund law, the private provident fund trust is required to invest the Provident Fund contributions received from the employees and the employer basis a prescribed investment pattern. Any deviation from investment pattern may lead to penal consequences for the employer. The EPFO vide its circular dated 23 February 2018 (notification dated 19 February 2018) has reduced the minimum investment limit applicable on Debt instruments and related category from 35% to 20%. Streamlining of the inspection procedure for defaulting employers The EPFO conducts inspection of the employers to review whether all Provident Fund compliances are being duly complied with. Where there is a default by the employer in depositing Provident Fund contributions, the EPFO categorizes such defaults into three categories: Category A: Default of 4 or more months Category B: Default of 2 or 3 months Category C: Default of 1 month Earlier, specific internal permission was required to be undertaken by the Inspection Officer to conduct such inspection. The EPFO vide its circular dated 27 February 2018 has streamlined the inspection procedure by stating that no internal permission would be required to conduct inspection in case of Category A and Category B defaults. Further, priority inspection will be done in case of big defaults considering quantum of default as per the contributions and number of employees. New facility to link Universal Account Number (UAN) and Aadhaar The EPFO had recently introduced online facility to link UAN with Aadhaar through e-kyc Portal at the EPFO website. In addition to the above, the EPFO has now introduced the linking facility through its UMANG mobile app.
Page 3 Below are the steps to use the facility through UMANG mobile app: Employee needs to provide his / her UAN. A One Time Pin (OTP) will be sent to the UAN registered mobile number. After OTP verification, the employee will have to provide Aadhaar details. Another OTP will be sent to Aadhaar registered mobile number and / or email. After OTP verification, UAN and Aadhaar will be linked where UAN and Aadhaar details are matched. Proposals made by the Central Board of Trustees of the EPFO: Basis the minutes of the 220 th Meeting of the Central Board of Trustees of the EPFO, the following proposals were made for upcoming changes to the Provident Fund law: Amendment to the definition of the basic wages : At present, the term basic wages, on which Provident Fund contributions is to be calculated has been defined to include all cash emoluments except: Dearness allowance Retaining allowance Cash value of food concession House rent allowance Overtime allowance Bonus Commission or any other similar allowance While dearness allowance, retaining allowance and cash value of food concession is excluded from the definition of basic wages but Provident Fund contribution is required to be contributed on the said components by virtue of other provisions under the Provident Fund law. Therefore, only the following allowances are excluded: house rent allowance, overtime allowance, bonus, commission or any other similar allowance As per minutes of the meeting of the Central Board of Trustees: (a) The above exclusions could lead to three possible interpretations: (similar to commission only) are excluded (similar to HRA, overtime allowance, bonus, commission) are excluded (any similar allowance) are excluded (b) The above multiple interpretations have led to disputes and litigation. (c) In order to resolve the above problem, a common definition of wages has been proposed as follows: Wages means all remuneration paid or payable in cash and includes any Basic wages; Dearness allowance; Retaining allowance; But does not include Any bonus, commission or any other similar allowance; House rent allowance; Value of any house-accommodation, or the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government; Any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon; Any travelling allowance or the value of any travelling concession; Any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment; Any retrenchment compensation or any gratuity or other retirement benefit payable to the employee or any ex-gratia payment made to him on the termination of employment; Any overtime allowance; and Cash value of any food grains. (d) It has also been proposed that if the exclusions mentioned above exceed 50% of the total remuneration, then the amount exceeding 50% will be considered as Wages for the purpose of calculating Provident Fund. (e) Further, any remuneration in kind which does not exceed 15% of the total remuneration will form part of Wages for the purpose of calculating Provident Fund. Interest rate of 8.55% for the financial year 2017-18 The EPFO has proposed interest rate of 8.55% for the financial year 2017-18 (For the financial year 2016-17, the interest rate was 8.65%). The interest rate once approved by the Ministry of Finance will be notified and credited to the individual Provident Fund accounts of the employees. Reduction of Provident Fund administrative charges from 0.65% to 0.50% of employees monthly pay The EPFO has proposed to reduce the Provident Fund administrative charges from 0.65% of monthly pay to 0.50% of monthly pay. In April 2017, the EPFO had reduced the administrative charges from 0.85% to 0.65%, which is currently applicable.
Page 4 Reduction in the minimum number of employees for mandatory coverage under the Employees Provident Fund from 20 to 10 The EPFO has proposed to reduce the employee threshold for coverage under the Provident Fund law from 20 employees to 10 employees Currently, employers employing 20 or more employees are mandatorily required to be covered under the Provident Fund law. All the above proposals by the EPFO will be effective once there is an official notification/circular from the Government of India/EPFO. Comments It is essential that employers keep track of the recent changes to the Provident Fund law and are aware of the changes. Employers should ensure that all eligible employees are made members of Provident Fund (unless employees qualify as excluded employees) and Provident Fund contributions are made in accordance with the provisions of the law. Any non-compliance with the Provident Fund obligations may lead to interest, damages and prosecution.
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