Management Development & Learning Programs

One Day Workshop

on
Provident Funds
(Issues and Anomalies)
under the Income Tax Ordinance, 2001

by

Zafar Ahmed
April 24, 2012, Karachi

1
Welcome Note

I welcome you all the participants here today.

This workshop has been planned based on the laws and rules of Provident
Funds under the Income Tax Ordinance, 2001 and its Rules.

The PF is generally the most desired part of salary package and therefore,
the subject demands it due attention due to its sensitivity in employer and
employee relationship and the tax implications..

The situation necessitates to establish a clear understanding of the subject.

This workshop has been planned with this basic aim.

Your very active participation is needed to achieve this very objective.

We thank you all once again

Norms

Participation
Adding ideas
Listening
No personal attacks
Timeliness; Punctuality
Mobile Phones: off or on silent mode
No Smoking Workshop
Participants Introduction

Please share with us your:

Name ; Syed Zafar Ahmed

Organization ; Shekha & Mufti,
Chartered Accountants
Functional title ; Director Taxes
(Department/Division)
Course Contents
1) Salary Taxation
2) Provident Fund; A retirement Benefit
3) Provident Fund; Types of PF
4) Provident Fund; Formation
5) Provident Fund; Registration
6) Provident Fund; Recognition
7) Provident Fund; Contribution and transfer of Fund
8) Provident Fund; Types of Loans and Withdrawals
9) Provident Fund; Limits on Loans and Withdrawals
10) Provident Fund; Second Loans and withdrawals
11) Provident Fund; Repayments
12) Provident Fund; Investments
13) Provident Fund; Distribution of Profits
14) Provident Fund; Tax Implication on the Employee
15) Provident Fund; Tax Implication on the Employer
16) Provident Fund; Tax Implication on the Fund
17) Provident Fund; Books of the Fund
18) Provident Fund; Accounts of Fund
19) Provident Fund; Audit of Fund
20) Provident Fund; Issues
SALARY TAXATION
Fractions of Definition of Salary

The definition is split into 7 parts for better understanding;

i. Salary/Pay/Base Pay
ii. Perquisites
iii. Allowances
iv. Reimbursement of expenses
v. Tax paid by the employer
vi. Employees Stock Option
vii. Profits in lieu of salary
SALARY TAXATION
Definition of Salary

Salary includes the following;

Pay
Wages
Leave pay
Leave encashment
Overtime
Bonus
Commission
Fee
Gratuity
Work condition supplements (like unpleasant or dangerous working conditions).

Perquisite may include company provided car, accommodation, services etc.

Allowances may include Rent allowance, Utilities allowance, Entert. allowance etc.
Reimbursement includes all expenditure that is paid or reimbursed by the employer
Tax paid by the employer is where the company has agreed to pay the employees tax
Employee Stock Option means right or option to acquire shares in the company with
the intent to dispose the same in future to earn capital gain.
SALARY TAXATION
Profits in lieu of Salary include;

Amount received for entering into an employment.

Amount received for any conditions or any changes to conditions of
employment.
Amount received for any restrictive covenant in respect of any past, present
or prospective employment;

Amount received on termination, voluntarily or under an agreement,

including any compensation for redundancy or loss of employment and
golden handshake (GHS) payment.
Amount received from a provident or other fund, to the extent to which the
amount is not a repayment of contributions made by employee.

Provident Fund therefore is a terminal benefit.

PROVIDENT FUND

A Retirement Benefit;
PF scheme is a retirement benefit scheme for employees.
PF scheme is contributory in nature.
Employee also makes contribution to his PF.
Employer and Employee make equal contribution to a fund.
The contributions of both are invested in profitable schemes.
Investment Income is credited to members account.
At retirement/resignation the total of er and ees contribution and its interest is
paid to the employee or to his nominees heirs incase of his death.
The fundamental liability to pay the PF stem from the SO Ordinance, 1968.

Income Tax Ordinance & Rules only explain about the taxation and
exemption of PF Funds.
PROVIDENT FUND

Types of Provident Fund;

1) Statutory Provident Fund

2) Recognized Provident Fund
3) Unrecognized Provident Fund
PROVIDENT FUND

Statutory Provident Fund;

Statutory Provident Fund is setup under the Provident Fund Act, 1925 and is
mostly maintained by Government, Semi Government Organization, Local
authorities, railways and recognized educational institutions.

Payment from such fund does not need Commissioner recognition separately.

Payment from such fund are exempted from income tax.

PROVIDENT FUND Recognized

Recognized Provident Fund

Recognized Provident Fund means a provident fund, which has been duly
recognized by the Commissioner in accordance with Part l of the 6th
schedule of ITO, 2001.

This type of PF is maintained by private sector organizations.

Payment from such fund gets exempt from income tax after recognition
PROVIDENT FUND

Un-recognized Provident Fund;

Un-recognized Provident Fund is actually not a separate type

It is a fund, which is neither a recognized Fund (as it has not been

approved) nor it is a Statutory Fund.

No exemption is available but there is no yearly taxability.

Employers contribution and interest thereon is fully taxable at the time of

payment to the employee.
PROVIDENT FUND

Formation of the Fund;

A fund is created by the employer titled as Employees Provident Fund.

A fund can be a common fund for all the employees or separate for
management and non management employees of the company.

In order to have a recognized provident fund, the fund needs to be vested in

an irrevocable Trust.

The management of the fund trust rests with the trustees of the fund
consisting of members of staff of the company who are appointed by the
company.

Generally three or five trustees are appointed in the management of the trust.
PROVIDENT FUND

Formation of the Fund;

The trust is put into black and white containing the Trust Deed and the Trust
Rules.
The deed should be declared by a document on a stamp paper of Rupees
500/-
The contents of the Deed and the Rules should be clearly defined in terms of
responsibilities, duties, right and the liabilities of following concerned parties
involved;
Company (Author of the trust)
Employees (Beneficiaries)
Trustees
Auditors
Income Tax Department
PROVIDENT FUND

Formation of the Fund;

Besides the above rules on the following should be included;
Administration of the fund
Management of the fund
Eligibility of the membership to the fund
Companys role and power in the administration of the fund
Contribution to the fund
Accounts of the fund
Audit of the fund
Investment of the funds monies
Distribution of the profits among members
Dispute resolution and arbitration
PROVIDENT FUND

Registration of the Provident Fund Trust;

The fund trust must be registered with the Registrar of the Trust.
The registration is mandatory as without registration the trust would not be a
valid trust and would not constitute a legal person.
Since the Provident Fund is separate entity from the company, the
registration gives it the desired legal status.
The process of registration is protractive and the requisites for application for
registration may include the original Deed and the Rules along with copies,
Photos of the trustees and their CNIC.
One of the trustees should be authorized appear before the Registrar for the
purpose.
PROVIDENT FUND -

Recognition of the Provident Fund

Application for recognition should be filed only after the registration has been
obtained from the Registrar.
Application is filed on prescribed format alongwith certain details and
information notably the Original Trust Deed and Trust Rules.
Under the current setup of the FBR, the application is to be filed before
the CIT, Legal if the case is in LTU and the CIT, Special Zone if the case
is in RTO. !!!!!!!!!!!!!!!!!!!!
Recognition is awarded for the lifetime of the fund and not on yearly basis.
There are certain conditions prescribed from the recognition apart form the
registration.
PROVIDENT FUND - Recognition of the Provident Fund;
Conditions for recognition:

In order that a provident fund may receive and retain recognition it shall
satisfy the conditions hereinafter specified and any other conditions which
the Federal Board of Revenue may, by rules, prescribe -

(a) all employees shall be employed in Pakistan , or shall be employed by an

employer whose principal place of business is in Pakistan:

Provided that the Commissioner may, if he thinks fit, and subject to such
conditions, if any, as he thinks proper to attach to the recognition, accord
recognition to a fund maintained by an employer whose principal place of
business is not in Pakistan, provided the proportion of employees employed
outside Pakistan does not exceed ten per cent;
PROVIDENT FUND - Recognition of the Provident Fund;
Conditions for recognition:

(b) the contributions of an employee in any year shall be a definite

proportion of his salary for that year, and shall be deducted by the
employer from the employee's salary in that proportion, at each
periodical payment of such salary in that year, and credited to the
employee's individual account in the fund:

Provided that an employee, who retains his employment while

serving in armed forces of Pakistan or when taken into, or employed
in, the national service under any law for the time being in force,
may, whether he receives from the employer any salary or not
contribute to the fund during his service in the armed forces of
Pakistan or while so taken into, or employed in, the national service a
sum not exceeding the amount he would have contributed had he
continued to serve the employer;
PROVIDENT FUND - Recognition of the Provident Fund;
Conditions for recognition:

(c) the contributions of an employer to the individual account of an employee in

any year shall not exceed the amount of the contributions of the employee in
that year, and shall be credited to the employee's individual account at
intervals not exceeding one year:

Provided that, subject to any rules, which the Federal Board of Revenue may
make in this behalf, the Commissioner may, in respect of any particular fund,
relax the provisions of this clause -
(i) so as to permit the payment of larger contributions by an employer to the
individual accounts of employees whose salaries do not, in each case,
exceed five hundred rupees per month;
(ii) so as to permit the crediting by employers to the individual accounts of
employees of periodical bonuses or other contributions of a contingent nature,
where the calculation and payment of such bonuses or other contributions is
provided for on definite principles by the regulations of the fund;
PROVIDENT FUND - Recognition of the Provident Fund;
Conditions for recognition:
(d) the employer shall not be entitled to recover any sum whatsoever from the
fund, save in cases where the employee is dismissed for misconduct or
voluntarily leaves his employment otherwise than on account of ill-health or
other unavoidable cause before the expiration of the term of service specified
in this behalf in the regulations of the fund:
Provided that in such cases the recoveries made by the employer shall be
limited to the contributions made by him to the individual account of the
employee, and to interest credited in respect of such contributions in
accordance with the regulations of the fund and accumulations thereof;
(e) the fund shall be vested in two or more trustees or in the Official Trustees
under a trust which shall not be recoverable save with the consent of all the
beneficiaries;
(f) the fund shall consist of contributions as above specified, received by the
trustees, or accumulations thereof, and of interest credited in respect of such
contributions and accumulations, and of securities purchased therewith and of
any capital gains arising from the transfer of capital assets of the fund, and of
no other sums;
PROVIDENT FUND - Recognition of the Provident Fund;
Conditions for recognition:
(g) the accumulated balance due to an employee shall be payable on the day
he ceases to be an employee of the employer maintaining the [1][fund]:

Provided that notwithstanding anything contained in clause (f) or (g): -

(i) at the request made in writing by the employee who ceases to be an
employee of the employer maintaining the fund, the trustees of the fund
may consent to retain the whole or any part of the accumulated balance due
to the employee to be drawn by him at any time on demand;
(ii) where the accumulated balance due to an employee who has ceased to be
an employee is retained in the fund in accordance with the preceding
clause, the fund may consist also of interest in respect of such accumulated
balance;
(iii) the fund may also consist of any amount transferred from the individual
account of an employee in any recognised provident fund maintained by his
former employer and the interest in respect thereof;

.
PROVIDENT FUND - Recognition of the Provident Fund;
Conditions for recognition:

(h) save as provided in clause (g) or in accordance with such conditions and
restrictions as the Federal Board of Revenue may, by rules, specify, no
portion of the balance to the credit of an employee shall be payable to him:

Provided that in order to enable an employee to pay the amount of tax

assessed on his total income as determined under sub-rule (4) of rule 7, he
shall be entitled to withdraw from the balance to his credit in the recognised
provident fund a sum not exceeding the difference between such amount
and the amount to which he would have been assessed if the transferred
balance referred to in sub-rule (2) of rule 7 had not been included in his total
income.
PROVIDENT FUND - Recognition of the Provident Fund;
Withdrawal of the recognition:

The Commissioner has the power to refuse the application of recognition.

The Commissioner has the power to withdraw the recognition granted earlier.

In both of the cases the CIT is however bound to serve a show cause for the
purpose explaining the cause of his action.
PROVIDENT FUND - Recognition of the Provident Fund;
Right of appeal against the CIT:

(1) An employer objecting to an order of Commissioner refusing to recognise, or

an order withdrawing recognition from a provident fund may appeal, within
sixty days of the service of such order, to the Federal Board of Revenue.

(2) The Federal Board of Revenue may admit an appeal after the expiration of
the period specified in sub-rule (1), if it is satisfied that the appellant was
prevented by sufficient cause from presenting it within that period.

(3) The appeal shall be in such form and shall be verified in such manner and
shall be accompanied by such fee as may be prescribed.
PROVIDENT FUND Contribution from the employer;

Monthly contributions are made by the employees through salary deduction

and an equal contribution is made by the employer.

Usual rate of contribution ranges between 8.33% to 10% of the monthly

salary.

A company shall be bound to collect the contributions of the employees

concerned and pay such contributions as well as its own contributions, if any,
to the trustees within fifteen (15) days from the date of collection.

Monthly salary for the purpose of calculation of contribution @ 8.33% or 10%

shall be the monthly basic salary plus dearness allowance only, if any. Other
allowances are not to be considered.

According to a decision of the Supreme Court of Pakistan the PF is to be

provided on the basis of monthly Gross salary instead of Basic. There
appears to be a conflict of law.
PROVIDENT FUND Contribution from the employer;

Limit on contribution by employers; (Rule 97)

The Commissioner may relax the limits fixed under clause (c) of sub-rule (1) of rule 2
of Part I of the Sixth Schedule to the Ordinance for contribution of an employer to the
individual account of an employee in any year provided that such contribution shall not
exceed the following limits, namely:-
(a) the employers aggregate contribution in any year including the normal contribution to
the individual account of any one employee, whose salary does not exceed Rs. 1000
per month, shall not exceed double the amount of the contribution of the employee in
that year; and
(b) the amount of the periodical bonuses and other contribution of a contingent nature
which may be credited by an employer in any year to the individual account of any one
employee shall not exceed the amount of the contribution of the employee in that year.
Limit on contributions by certain employees; (Rule 98)

Where an employee of a company owns shares in the company with a voting power
exceeding ten per cent of the whole of such power, the sum of the exempted
contributions of the employee and employer to the recognised provident fund
maintained by the company shall not exceed Rs. 1000 in any month.
PROVIDENT FUND Transfer of funds from the employer

Treatment of fund transferred by employer to trustee; (Rule 9 of 6th

Schedule)
(1) Where an employer, who maintains a provident fund (whether recognised or
not) for the benefit of his employees and has not transferred the fund or any
portion of it, transfers such fund or portion to trustees in trust for the
employees participating in the fund, the amount so transferred shall be
deemed to be of the nature of capital expenditure.
(2) When an employee participating in such fund is paid the accumulated balance
due to him there from, any portion of such balance as represents his share in
the amount so transferred to the trustees (without addition of interest, and
exclusive of the employee's contributions and interest thereon) shall, if the
employer has made effective arrangement to secure that tax shall be
deducted at source from the amount of such share when paid to the
employee, be deemed to be an expenditure by the employer, within the
meaning of section 20, incurred in the tax year in which the accumulated
balance due to the employee is paid.
PROVIDENT FUND Transfer of funds from the employer
Treatment of balance in newly recognised provident fund; (Rule 7 of 6th
Schedule)
(1) Where recognition is accorded to a provident fund with existing balance, an
account shall be made of the fund up to the day immediately preceding the
day on which the recognition takes effect showing the balance to the credit of
each employee on such day and containing such further particulars as the
Federal Board of Revenue may prescribe.
(2) The account referred to in sub-rule (1) shall also show in respect of the
balance to the credit of an employee the amount thereof which is to be
transferred to that employee's account in the recognised provident fund, and
such amount (hereinafter called his `transferred balance') shall be shown as
the balance to his credit in the recognised provident fund on the date on
which the recognition of the fund takes effect, and the provisions of sub-rule
(4) and the proviso to clause (h) of rule 2 shall apply thereto.
(3) Any portion of the balance to the credit of an employee in the existing fund,
which is not transferred to the recognised fund, shall be excluded from the
accounts of the recognised fund and shall be liable to income tax in
accordance with the provisions of this Ordinance, other than this Part.
PROVIDENT FUND Transfer of funds from the employer

Treatment of balance in newly recognised provident fund; (Rule 7 of 6th

Schedule)

(4) Subject to such rules as the Federal Board of Revenue may make in this behalf,
the Commissioner shall make a calculation of the aggregate of all sums
comprised in a transferred balance which would have been liable to income-tax
if this Part had been in force from the date of the institution of the fund, without
regard to any tax which may have been paid on any sum, and such aggregate, if
any, shall be deemed to be income received by the employee in the income year
in which the recognition of the fund takes effect and shall be included in the
employee's total income for that year, and, for the purposes of assessment, the
remainder of the transferred balance shall be disregarded, but no other
exemption or relief, by way of refund or otherwise, shall be granted in respect of
any sum comprised in such transferred balance:
Provided that, in cases of serious accounting difficulty, the Commissioner
may, subject to the said rules, make a summary calculation of such aggregate.

(5) Nothing in this rule shall affect the rights of the persons administering an
unrecognised provident fund or dealing with it, or with the balance to the credit
of any individual employees, before recognition is accorded, in any manner,
which may be lawful.
PROVIDENT FUND Transfer of funds from the employer

From one recognised PF to another recognised PF;

The accumulated balance of an employee in a recognised provident fund shall

be excluded from the computation of his total income even on the change of
his employment if his accumulated balance is transferred to his individual
account in any recognised provident fund maintained by such other employer.
(Rule 4 of 6th)
PROVIDENT FUND Loan and withdrawals

Withdrawals, both permanent (i.e., non-repayable) as well as temporary (i.e.,

in the form of loan) are allowed against balances standing to the credit of
employees accounts, thus providing a useful source of financing in case of
need.

The Income Tax Rules, however, restrict the purpose for which such
withdrawals can be made and the amount, which can be withdrawn and also
lay down rules for deciding whether withdrawals can be permanent or would
be given as loans.
PROVIDENT FUND Loan and withdrawals

Withdrawal by employees from accumulated balance may be allowed by the trustees

in the following circumstances.

(a) Expenses in connection with the illness of a subscriber or a member of his

family
(b) Expenditure on purchase of a motor cycle or scooter provided that
authenticated copies of documents substantiating such purchase are
deposited with trustees of the fund
(c) Overseas passage by reason of health or education of a subscriber or a
member of his family
(d) Expenses in connection with marriages, funerals or ceremonies, which, by
the religion of the subscriber, it is incumbent upon him to perform and in
connection with which it is obligatory that expenditure should be incurred.
(e) Expenses in connection with the performance of Hajj by the subscriber.
PROVIDENT FUND Loan and withdrawals

(f) Expenditure on building or purchasing a house or a site for a house,

provided that the documents substantiating the building or purchase
of such house, or the purchase of such site, are deposited with the
trustees of the fund.
(g) Expenditure on repairs, renovation extension of a residential house
belonging to the subscriber.
(h) Premiums on policies of insurance on the life of the subscriber or of
his wife provided that the policy is assigned to the trustees of the fund
or at their discretion deposited with them and that the receipt granted
by the insurance company of the premiums is from time to time
handed over to the trustees for inspection by the Commissioner.
(i) To purchase share of a public limited company for investment.
PROVIDENT FUND Loan and withdrawals

(j) In case of a subscriber who has attained the age of 50 years on the date on
which withdrawal is permitted.
(i) subject to sub rule (2), to meet the expenditure on the purchase of a house or
construction of a house on land owned by him or a member of his family
anywhere in Pakistan.
(ii) subject to sub-rule (3), to meet expenditure on the purchase of agriculture
land from Government.
(iii) to repay a loan taken from a financial institution, provided that the subscriber
shall, within a period of two weeks from the date of withdrawal produce
satisfactory evidence before the trustees to show that the advance has been
utilized for the purpose for which it was drawn failing which the entire amount
of withdrawal together with interest accrued thereon shall forth with become
repayable to the fund in a lump-sum; and
(iv) without assigning any reason; or
PROVIDENT FUND Loan and withdrawals

(k) in the case of an employee proceeding on leave preparatory to retirement, at

the discretion of the trustees of the fund, without assigning any reason,
provided that where an employee rejoins duty on the expiry of his leave, the
amount withdrawn together with the interest accruing thereon at the rate
allowed by the fund shall be repaid forthwith in to the fund in a lump-sum.
PROVIDENT FUND Loan and withdrawals

The first installment of a withdrawal under sub-clause (i) of clause (j) of sub-rule 1
(Purchase/construction of house/land) shall be allowed to be drawn only after
an agreement has been executed between the subscribe and the trustees of
the fund to effect that the subscribe shall expend the full amount of the said
advance towards the purchase or the building of a house as clamed at the
earliest possible opportunity and if the actual amount so expended is less
than the amount of permitted withdrawal the subscriber shall repay the
difference into the fund forthwith and further that if the said house is sold or
otherwise alienated by its owner to any other person while the subscribe is
still in service, the subscriber shall forthwith repay into the fund the entire
amount of the withdrawal together with interest accrued thereon in lump-sum.
PROVIDENT FUND Loan and withdrawals

The first installment of a withdrawal under sub-clause (ii) of clause (j) of sub-rule
1 (Purchase of agriculture land from government) shall be allowed to be
drawn only after an agreement has been executed between the subscriber
and the trustees of the fund to the effect that the subscriber shall expend the
full amount of the said advance towards the purchase of the said piece of land
at the earliest possible possible opportunity and if the actual amount so
expended is less than the amount of permitted withdrawal the subscriber shall
repay the difference into the fund forthwith and further that if the said house is
sold or otherwise alienated by its owner to any other person while the
subscribe is still in service, the subscriber shall forthwith repay into the fund
the entire amount of the withdrawal together with interest accrued thereon in
lump sum.
PROVIDENT FUND Limits on Loans and
withdrawals
Withdrawals permitted under these rules shall not exceed the following limits,
namely:
(a) in the case of withdrawals permitted under clause (a), (b) (c) or (d) of sub-rule (1)
of rule 103, six months salary of the subscriber or the total of accumulated
balance to his credit, whichever is the less; (IIIness, M. cycle, overseas passage,
marriage etc.)
(b) in the case of withdrawals permitted under clause (e) of sub-rule (1) of rule 103,
six months salary of the total of the accumulated balance to his credit, whichever
is the lowest; (Hajj)
(c) in the case of withdrawal permitted under clause (f) or (g) of sub-rule (1) of rule
103, thirty-six months salary of the subscriber or the total of accumulated balance
to his credit, whichever is the less; (Purchase/Cont. of house, Repair/Renovation)
(d) in the case of withdrawals permitted under clause (h) of sub-rule (1) of rule 103,
eighteen months salary of the subscribe or the total of the accumulated balance to
his credit, whichever is the less, provided that this restriction shall apply to each
withdrawal and not to the total withdrawal; (Insurance premium)
PROVIDENT FUND Limits on Loans and withdrawals

(e) in the case of withdrawals permitted under clause (i) of sub-rule (1) of rule
103, six months salary of the subscriber or ten thousand rupees or the total of
the accumulated balance to his credit, whichever is the lowest; (Shares of a
public limited company)
(f) in the case of withdrawals permitted under sub-clause (i), (ii) and (iii) of clause
(j) of sub-rule (1) of rule 103, twenty-four months salary of the subscriber or
eighty percent of the total of the accumulated balance to his credit, whichever
is the less; (50 Years age)
(g) in the case of withdrawals permitted under sub-clause (iv) of clause (j) of sub-
rule (1) of rule 103, sixty percent of the total of the accumulated balance to his
credit of subscribe; (50 years w/o reason) and
(h) in the case of withdrawals permitted under clause (k) of sub-rule (1) of rule
103, ninety percent of the accumulated balance to the subscriber. (leave
preparatory to retirement)
PROVIDENT FUND Limits on Loans and withdrawals

For the purpose of loans and withdrawals

(a) accumulated balance means the total of the accumulations of exempted

contributions and exempted interest contained in the balance to the credit of
the employee at the time of withdrawals;
(b) family means the employees wife, legitimate children, step children,
parents, sisters and brothers who reside with the employee and are wholly
dependent on him; and
(c) salary means Basic salary and dearness Allowance
PROVIDENT FUND Second Loans and withdrawals

(1) Save as provided in sub-rules (2), (3), (4) and (5), no second withdrawal from a
recognized provident fund shall be permitted until the sum first withdrawn has
been fully repaid.
(2) A withdrawal may be permitted for the purposes specified in clause (h) of sub-rule
(1) of rule 103, notwithstanding that the sum withdrawn for any other purpose has
not been repaid. (Insurance Premium)
(3) Subsequent withdrawals for the purposes specified in clause (h) of sub-rule (1) of
103 may be permitted, notwithstanding that the sum or sums previously drawn for
the same purpose has or have not been repaid. (Insurance Premium)
(4) A withdrawal for any one of the purposes specified in sub-rule (1) of rule 103 other
than that specified in clause (a) (IIInes)of that sub-rule may be permitted
notwithstanding that the sum or sums withdrawal for the purposes of clause (e) of
sub-rule (1) (Hajj) has or have not been repaid.
(5) A withdrawal for any of the purposes specified in sub-rule (1) of rule 103 other
than those specified in clauses (f) (House) and (h) (Insurance) of that sub-rule
may be permitted notwithstanding that the sum previously withdrawn for the
purposes of clause (d) of sub-rule (1) (marriage etc.) has not been repaid.
PROVIDENT FUND Repayments

(1) Where any withdrawal is allowed for a purpose specified in clause (f), (h), (i),
(j) or (k) of sub-rule (1) of rule 103, the amount withdrawn need not be
repaid. (House, Insurance, Shares, 50 years age, leave preparatory)

(2) Subject to sub-rules (3) and (4), where a withdrawal is allowed for a
purpose other than those referred to in sub-rule (1), the amount withdrawn
shall be repaid in not more than forty-eight equal month installments and
shall bear profit.
PROVIDENT FUND Repayments

(a) Withdrawals, which are repaid in not more than twelve monthly installments.
The rate of mark-up fixed by the Federal Government under rule 3(b) of Part-I of the Sixth
Schedule to the Ordinance (16%) payable in the form of one additional instilment.
(b) Withdrawals, which are repaid in more than twelve but not more than twenty-four
monthly installments.
The rate of mark-up fixed by the Federal Government under rule 3(b) part-I of the Sixth
Schedule to the Ordinance (16%) payable in the form of two additional installments.
(c) Withdrawals, which are repaid more than twenty-four but not more than thirty-six
monthly installments.
The rate of mark-up fixed by the Federal Government under rule 3(b) of Part-I of the Sixth
Schedule to the Ordinance (16%) payable in the form of three additional installments.
(d) Withdrawals, which are repaid in more than thirty-six months installments.
The rate of mark-up fixed by the Federal Government under rule 3(b) part-I of the Sixth
Schedule to the Ordinance (16%) payable in the form of four additional installments.
PROVIDENT FUND Repayments

(3) For the purposes of sub-rule (2) and at the discretion of the trustees of
the fund, profit may be recovered on the amount withdrawal or the balance
thereof outstanding from time to time at 1 per cent above the rate which is
payable for the time being on the balance in the fund to the credit of the
subscriber.
(4) Where an employee contributing to the fund elects not to receive any
profit accruing on his accumulated balance, no profit shall be charged on the
amount withdrawn by him from the fund.
(5) The employer shall deduct such installments payable under sub-rule (2) from
the employees salary and pay them to the trustees commencing from the
second monthly payment made after the withdrawal or, in the case of an
employee on leave without pay, from the second monthly installment after his
return to duty.
(6) In the case of default of repayment of installments under sub-rules (2)
and (5), the Commissioner may at his discretion, order that the amount of
withdrawal or the amount outstanding shall be added to the total income of
the employee for the year in which the default occurs and the employee shall
be assessed accordingly.
PROVIDENT FUND Power to relax conditions

Notwithstanding anything contained in rules 103, 104, 105 or 106, the

Commissioner may in special circumstances to be recorded in writing relax the
conditions for withdrawals from and repayment to the fund.
PROVIDENT FUND Investments

Where the employer is not a company

The contributions made by employees only and its interest shall be wholly
invested.
Investments can be made as follows;
Securities of the nature specified in clause (2)(b),(c),(d) or (e) of section
20 of the Trusts Act, 1882.
Post Office Savings Bank Account in Pakistan
Deposited in National Savings
Federal Government securities
Deposits in NCBs
Deposits in NBP
Other government securities
Any other established financial institutions including mutual funds (subject
to maximum of 20% of such deposits or investment at any time in the
year)
PROVIDENT FUND Investments

Where the employer is not a company

Both employer and employee contribution shall be wholly invested.
Investments can be made as follows;

In accordance with the provisions of section 227 of the Companies

Ordinance, 1984
Deposited or invested as is allowed in case of the above
Purchase of shares of a public limited company offered for sale inviting
public offer by the Federal Government (with the CIT approval)
PROVIDENT FUND Investments

Investment Rules, 1996;

Investment rules for Provident Funds monies were issued in the year 1996, which
specifies the discipline for investments in the listed securities.
These are as follows;
Total investment in listed securities shall not exceed 10% of the PF.
Total investment in any single security or in any single company shall not
exceed 1% of the PF.
Only those companies shall be purchased who have a minimum
operational record of 5 years
Only those companies shall be purchased who have a paid atleast
15%dividend in last 3 consecutive years
In case of investment other than in shares only those instrument will be
purchased which has been rated minimum BBB by an agency registered
with the SECP and the rating is maintained at the time of purchase.
Investment will not be made if it is known that the issuer has defaulted.
PROVIDENT FUND Investments

Investment Rules, 2005;

Investment rules for Provident Funds monies were reissued in the year
2005, which specifies the discipline for investments in the following 3
categories;

a) Investment in Listed Securities

b) Investment in Listed Unit Trusts Schemes
c) Investment in Closed end Fund Schemes.
PROVIDENT FUND Investments

Investment Rules, 2005;

Conditions for investments in Listed Securities are as follows;

Maximum investment in listed securities shall not exceed 30% of the PF.
Maximum investment in any single company shall not exceed 5% of the
paid up capital of that company.
Only those companies shall be purchased who have a minimum
operational record of 5 years
Only those companies shall be purchased who have shown return atleast
25% more than the last 5 years period PIB.
In case of investment other than in shares only those instrument will be
purchased which has been rated minimum BBB by an agency registered
with the SECP and the rating is maintained at the time of purchase.
PROVIDENT FUND Investments
Investment Rules, 2005;

Conditions for investments in Listed unit Trust Schemes are as follows;

Maximum investment in listed unit trust scheme shall not exceed 50% of
the PF. (including the 30% limit of Listed securities)
Maximum investment in any single unit trust shall not exceed 20% of the
PF money.
Unit Trust Fund must be A rated by an agency registered with the SECP
and the rating is maintained at the time of investment.
PROVIDENT FUND Investments

Investment Rules, 2005;

Conditions for investments in Closed End Fund Schemes are as follows;

Maximum investment in Index Funds/Closed End Funds Schemes shall
not exceed 10% of the PF. (within the above 50% limit)
Maximum investment in any single fund shall not exceed 5% of the paid
up capital of that fund.
Only those fund shall be purchased who have shown return atleast 25%
more than the last 5 years period PIB.
Fund must be A rated by an agency registered with the SECP and the
rating is maintained at the time of investment.
PROVIDENT FUND Distribution of profits
Profit is distributed at the year-end based on the closing balance of the
accumulated balance standing to the credit of the employee. It is advisable that
the calculation is based on the average balance.
Interest credited, if exceeds the benchmark of 16% or the 1/3 of salary, exposes
the employee to tax. It remains advisable to restrict the distribution upto the limit.
Profits (based on market value of securities) credited, if exceeds the benchmark of
16% or the 1/3 of salary exposes the employee to tax. It remains advisable to
defer the distribution upto the limit as the value of securities may always be
reversed down in the next year.
The rule does not prescribe as to whether higher or the lower of 16% or the 1/3
would be taxable.
Interest or the profits credited shall be included in the total income and not to the
Salary income.
Therefore the responsibility of withholding of tax shall not lie on the trust under the
head salary.
Accordingly the salary certificates will also not be effected.
PROVIDENT FUND Tax implication on the employee

Contribution in excess of 10% of Salary (Basic and Dearness Allowance) is taxable.

Gross Exempt Taxable

Salary 850,000 - 850,000
Employers contribution 100,000 85,000 15,000
950,000 85,000 865,000

Interest credited on the balance to the credit of the employee is exempt upto one third
of the salary or at the rate of 16% per anum whichever is lower.

It implies that if the interest rate has been @ 17% the excess of 1% will be taxable even
though the amount of interest is below the 1/3 amount of the salary and vice versa.

The accumulated balance due and becoming payable to any employee participating in
a recognized provident fund is fully exempt under clause (23) of 2nd schedule/ Rule
99/Rule 4 of 6th Schedule.

Transfer of fund from one recognized Provident Fund to other shall also be excluded
from the computation of his total income.
PROVIDENT FUND Tax implication on the employee

Treatment of consideration for dealings with beneficial interest; (Rule100)

If an employee assigns or creates a charge upon his beneficial interest in a recognised
provident fund, the Commissioner shall, on the fact of the assignment or charge coming
to his knowledge, give notice to the employee that if he does not secure the
cancellation of the assignment or charge within two months of the date of receipt of the
notice, the consideration received for such assignment or charge shall be treated as
salary received by him in the year in which the fact became known to the Commissioner
and shall be assessed accordingly.

Treatment in certain cases where recognition is withdrawn; (Rule 101)

If the Commissioner withdraws recognition from a recognized provident fund, the
balance to the credit of each employee at the end of the financial year prior to the date
of the withdrawal of recognition shall be paid to the employee free of tax at the time
when such employee receives the accumulated balance due to him and the remainder
of the accumulated balance due to him shall be liable to tax as if the fund had never
been recognized

The balance at the end of financial year prior to the date of withdrawal of recognition is
exempt
The remainder of the accumulated balance shall be liable tax.
PROVIDENT FUND Tax implication on the employer

1- Deduction not allowed

Any contribution made by the employer to a fund that is not a recognized
provident fund will be disallowed as a tax expense.

2- Deduction not allowed

Any contribution made by the employer to any provident established for the
benefit of employees, unless the employer has made effective arrangements
to secure that tax is deducted under section 149 from any payments made by
the fund in respect of which the employee is chargeable to tax under the head
Salary.

3- Any payment of salary made without deduction of tax will be disallowed.

PROVIDENT FUND Tax implication on the fund

The income of the fund is exempt from tax under Clause 57 (3) (ii) of Part I of
the 2nd Schedule.
Despite the exemption it is necessary to apply for withholding
exemption on income of the Fund.
The exemption is applied under Section 150 against 10% withholding on
Dividend income.
The exemption is applied under Section 151 against 10% withholding on
Interest income.
It is better to apply exemption under both the section to save time and
the cost.
It is important to apply for whole of the year.
It is very important to apply exemption under Section 151 in its entirety.
This would mean exemption on all the following four sources of interest
income;
Interest on National Savings Schemes
Interest on Bank Deposits
Interest on security of FG, PF and the Local Authority
Interest on inter company loans
PROVIDENT FUND Tax implication on the fund

The filing of return of income is mandatory on the Provident Fund being a trust.
Trust is considered as a company. Extracts from the definition would assist
(i) a company as defined in the Companies Ordinance, 1984 (XLVII of 1984);
(ii) a body corporate formed by or under any law in force in Pakistan;
(iii) a modaraba;
(iv) a body incorporated by or under the law of a country outside Pakistan relating to
incorporation of companies;
(v) a trust, a co-operative society or a finance society or any other society established or
constituted by or under any law for the time being in force;
(vi) a foreign association, whether incorporated or not, which the Federal Board of Revenue
has, by general or special order, declared to be a company for the purposes of this
Ordinance;
(vii)a Provincial Government;
(viii) a local authority in Pakistan; or
(ix) a Small Company as defined in section 2;
The PF should also obtain National Tax Number so as to enable it to file the return of
income and to perform its withholding responsibility.
Where the Fund desire to have year-end different form the June end it can apply to the
CIT for the permission to use the December or any month end as its Tax Year.
PROVIDENT FUND Books of the Fund

Books maintained are;

1) Personal Files
2) Payroll Register / Salary sheets
3) Members Ledger / Card
4) Investment Register
5) Minutes Book of Board of Trustees
6) General Ledger
7) Cash Book / Bank Book

Documents maintained are;

Payment Voucher
Receipt Voucher
Journal Voucher
Bank pay-in-slip
Cheque Book
Bank Statement
Bank Reconciliation
Loan Application
Member Forms
PROVIDENT FUND Accounts of the fund

Accounts of recognised provident funds; (Rule 8 of 6th Schedule)

(1) The accounts of a recognised provident fund shall be maintained by the trustees of the
fund and shall be in such form and for such periods, and shall contain such particulars,
as may be prescribed.
(2) The accounts shall be open to inspection at all reasonable times by income tax
authorities, and the trustees shall furnish to the Commissioner such abstracts thereof
as may be prescribed.
Accounts required to be maintained by a recognised provident fund; (Rule 95)
(1) A recognised provident fund shall prepare accounts at intervals of not more than twelve
months.
(2) An account shall be maintained for each subscriber to the fund and it shall include the
particulars shown in the following form, namely:-
Account closed.
Date
Paid to employee
Lapsed to the employer
Or to fund
Recovery by employer
Name_______________ Date of joining Fund_______________
PROVIDENT FUND Accounts of the fund

Annex

Contribution by the employer

Month & Salary By Normal Of Total in Total

Year employe continge columns interest
es nt 3,4,5. on the
nature amount
shown in
column
6.
1 2 3 4 5 6 7
PROVIDENT FUND Accounts of the fund
Balance brought forward
July_________________________
August_______________________
June_________________________

Total:________________________

Exempt Not exempt

Employers Interest on Contribution Interest Additions to Remarks.

contribution sum in Column 4+5 Column 7 total income
not exceeding Column 6 at % minus Column minus Column 10 plus
statutory limit. but not 8 9. Column 11.
exceeding
statutory limit
8 9 10 11 12 13
PROVIDENT FUND Accounts of the fund

Adjustment on account of temporary

Withdrawals account (Column 8 and 9 only).
Adjustment on account of non-payable
Withdrawals account Columns 10 and 11.
Total carried over.
If desired column 7 may be divided into sub-columns showing separately the interest
on columns and columns 4 and 5 respectively.
____________________________________________________________________
Amount Advance Repayment
___________________________________________________________________________________________
July Balance brought
Forward__________________
July_____________________
August August___________________
June June_____________________

Total ___________________
PROVIDENT FUND Accounts of the fund

(3) The trustees of a recognised provident fund shall furnish to the Commissioner
an abstract for the funds accounting period of the individual account of each
employee participating in the fund whose income under the head Salary is
Rs. 24,000 or more per annum.
(4) The abstract shall
(a) be in the form prescribed in sub-rule (2), but shall show only the total of
the various columns thereof for funds accounting period; and
(b) include an account of any temporary withdrawals by the employees
during the year and of the repayment thereof.
(5) The abstract shall be furnished by the trustees to the Commissioner
responsible for the area in which the accounts of the fund are kept or to such
jurisdiction or functional Division as the Commissioner may, in each case,
direct.
PROVIDENT FUND Accounts of the fund
(6) Subject to rule, the abstract shall be furnished -
(a) in the case of a company, on or before the first day of August next following the funds
accounting period or within fifteen days of the expiry of six months from the end of the
funds accounting period, whichever is later; and
(b) in any other case
(i) where the funds accounting period ends at any time between the first day of July and
the thirty-first day of December (both days inclusive), on or before the first day of August
next following; or
(ii) in any other case, on or before the first day of October next following the end of the
funds accounting period.
(7) The account to be made under the provisions of sub-rule (1) of rule 7 of Part I of the Sixth
Schedule to the Ordinance shall show in respect of each employee
(a) the total salary paid to the employee during the period of participation in the provident
fund;
(b) the total contributions made by, or in respect of, the employee;
(c) the total interest which has accrued thereon; and
(d) so far as may be, the percentage of the employees salary in accordance with which
contributions have been made by the employer and the employee.
PROVIDENT FUND Accounts of the fund

Time limit for submission of accounts kept outside Pakistan; ( Rule 96)

(1) Where the accounts of a recognised provident fund are kept outside Pakistan,
certified copies of the accounts shall be supplied not later than the 15th
September in each year to a local representative of the employer in
Pakistan.

(2) The Commissioner may, upon application in writing, fix a date later than the
15th September as the date by which the certified copies shall be supplied.
PROVIDENT FUND Audit of the fund

It is advisable that audit of the PF Trust should be conducted on

Annualised basis.
Auditor of the company and of the PF Trust need not to the same.
Auditor of another Terminal benefit trust for e.g. Gratuity Fund and of
the PF need not to be the same.
Audit fee not necessarily from the company, it can also be borne by
the Fund itself.
If audit fee is paid by the trust, it should withhold income tax.
 Thank You For
Your Participation