EPFO circular on utilization of reserves and surplus by private Provident Fund Trusts of exempted establishments

The Employees Provident Fund Organisation (EPFO) has issued a circular dated 7 October 2024 (No. E.III/10(122)/ 2024/Circular/Exemption/5435) regarding the manner of utilization of Reserves and Surplus by private Provident Fund Trusts of exempted establishments, for distribution of interest among members.

This circular is issued by the EPFO Head Office after observing instances of exempted establishments seeking permission to utilize Reserves and Surplus lying in the Provident Fund Trusts by crediting interest to existing beneficiaries at a much higher rate (as compared to the EPFO notified interest rate) during / just prior to surrender of exemption and transition to the EPFO. As per the circular, the EPFO has given a thoughtful consideration to the issue and its legal ramifications and has the set out the following principles:

• Inflated Reserves and Surplus is indicative of non-distribution of earnings of previous years amongst the incumbent beneficiaries. Such earnings should have been distributed as higher interest for the beneficiaries.
• Interest is to be credited on monthly running balances and cannot be credited for broken periods of a year.
• Rate of interest allowed to beneficiaries should be commensurate with the earnings of the fund.
• Overdrawal of Reserves and Surplus is not permitted.

It is also specifically mentioned that where the Reserves and Surplus have been generated over time by utilizing accretions of several past and present beneficiaries, distributing such funds among incumbent beneficiaries would amount to an unjust enrichment of few at the expense of others. The EPFO has specified that this is in contravention of Para 60 of the Employees’ Provident Funds Scheme, 1952 (‘EPF Scheme’) and a violation of Section 17 of the Indian Trusts Act (i.e., Trustees to be impartial).

The EPFO has also instructed the Regional Provident Fund offices to highlight such instances as part of the compliance audit as per the Standard Operating Procedure (SOP) for management and regulation of EPF exempted Trusts. It is also clarified that such surplus (undistributed interest on investments) should be transferred by the establishments to the EPFO upon surrender of exemption in accordance with Para 28(2) of the EPF Scheme.

Lastly, the circular also provides that the instructions are in supersession of all existing circulars on this issue and has specifically withdrawn the following two circulars with immediate effect:

• C.Ex / misc / comp. audit/ 2009 / 43789 dated 20 October 2010
• C.Ex / misc / comp. audit/ 2009 / 104919 dated 17 March 2011

EY comments:

Organizations operating private Provident Fund Trusts may analyze the impact of the above circular, especially where the Trusts have balance lying in Reserves and Surplus. However, it is also important to note the following aspects which have created some ambiguity on the utilization of Reserves and Surplus:

• The EPF Act and the EPF Scheme do not seem to have any specific provision on the manner of utilization of Reserves and Surplus by a private Provident Fund Trust. The EPF Scheme provides that the rate of interest declared by such Trust should not be lower than the statutory rate. Thus, the enforceability of this circular needs evaluation, especially in the absence of any specific provision in the EPF Act and EPF Scheme.
• The erstwhile circulars on this matter (now withdrawn) had acknowledged that the Reserves and Surplus are created over a period out of the yield on investments of member contributions. It was also clarified that such amount lying in the reserves can be used for declaring interest at statutory rates or higher rates. Hence, there seems to be a deviation from previous circulars in the position being adopted by EPFO now.
  
  Thus, where private Provident Fund Trusts (a) have utilized Reserves and Surplus in the past to give interest to members at statutory rates or higher rates; or (b) have balance lying in Reserves and Surplus as on date, it will be important to see whether the EPFO will raise questions on the surplus earned in the past (i.e., prior to issuance of the circular) or the EPFO asks establishments to comply with this requirement prospectively.
• If organizations need to distribute the surplus earned to ensure compliance with the instructions, further clarity needs to be provided on the manner of calculation of the distributable surplus to be paid as interest to members.
  
  For instance, the Reserves and Surplus may comprise unrealized gains on account of mark to market valuations and / or there may be provisions made for diminution in value of investments. Whether the distributable surplus should be determined considering the unrealized gains and whether the provisions for diminution in investments can be adjusted – are some of the aspects which need to be clarified.