CBDT amends income tax rules for PF trusts

Private provident funds and superannuation funds, that channelise a larger chunk of their corpus equity will not attract income tax, following a change in tax rules. The tax-free status would allow more of retirement savings to flow into shares.

The Central Board of Direct Taxes (CBDT), the apex direct taxes body has now issued a notification, aligning the investment pattern prescribed in its rules with the new one given out by the Department of Economic Affairs, to allow these funds' equity investments tax-free status. The DEA, under the finance ministry had announced the new investment formula for these funds in August, 2008, permitting them to invest up to 15% of their corpus in the stock market instead of the earlier 5%. The new investment pattern comes into effect from April 1, 2009. Therefore, aligning the CBDT investment pattern with the one prescribed by DEA was very crucial for these entities to retain their tax-free status.

Income-tax rule 67 prescribes an investment pattern for private provident funds and superannuation funds which is to be followed mandatorily to avail tax benefits. Income earned on investments not in line with the pattern prescribed by tax body face tax.

As per the new patter, equity investments can made in shares of companies on which derivatives are available in BSE/NSE.

The funds would also be able to channelise upto 55% of their funds in central and state government securities and units of mutual funds investing in such securities. The new pattern also allows these entities to park their funds to the tune of 40% in debt securities with maturity of not less than three years tenure issued by companies, banks and public financial institutions, term deposits of scheduled commercial banks and rupee bonds having an outstanding maturity of at least three years issued by multilateral institutions such as the International Bank for Reconstruction and Development, International Finance Corporation and the Asian Development Bank. Investments in money market mutual funds has been capped at 5% of the ttal corpus.