On October 7, 2024, the Employees Provident Fund Organisation (EPFO) issued an important circular addressing the management of reserves and surplus by private Provident Fund Trusts of exempted establishments. This guidance comes in response to observed practices where some establishments sought to credit interest to beneficiaries at rates significantly higher than those declared by the EPFO, particularly around the time of surrendering their exemption status.
Key Takeaways from the Circular
- Understanding Reserves and Surplus: The EPFO highlighted that inflated reserves and surplus often indicate a failure to distribute earnings among beneficiaries in previous years. This raises concerns about the fairness of interest allocation, suggesting that higher interest rates should have been credited to members.
- Interest Crediting Rules: Interest must be calculated on monthly running balances. The EPFO explicitly prohibits crediting interest for broken periods of a year, ensuring a consistent and fair approach to how interest is applied.
- Earnings-Based Interest Rates: The circular stresses that the interest rates credited to beneficiaries should correspond to the actual earnings of the Provident Fund. This is crucial for maintaining equity among members.
- Strict Prohibition on Overdrawal: Overdrawing from reserves and surplus is not permitted. This rule is in place to prevent unjust enrichment, where certain beneficiaries might receive undue advantage at the expense of others.
Legal Ramifications
The circular underscores that practices aimed at distributing higher interest rates during the transition away from exemption status are illegal. The EPFO clarified that such practices are illegal and violate Para 60 of the EPF Scheme and Section 17 of the Indian Trusts Act, which mandates impartiality in trust management.
Further, the use of surplus for distributing higher interest rates to select beneficiaries is deemed unjust enrichment, benefiting a few at the cost of others. Upon surrendering or cancellation of an exemption, all accumulated funds including undistributed interest, must be transferred to the Central Board of Trustees (CBT), EPFO, in accordance with Para 28(2) of the EPF Scheme.
Compliance and Enforcement
This new circular supersedes previous guidelines issued in 2010 and 2011, which are now withdrawn. Zonal and regional offices have been instructed to ensure compliance with these updated rules and to communicate them effectively to all exempted establishments.
Non-compliance will be highlighted during audits, emphasizing the seriousness of adhering to these guidelines.
