Staff of 80 companies may lose provident fund tax sop

NEW DELHI: Thousands of employees of around 70-80 companies run the risk of being denied tax exemption on their provident fund contributions from April as their employers have failed to get the approvals for availing the benefit from the Employees Provident Fund Organiation ( EPFO), which regulates these entities.

Apart from employers contributing directly to EPFO, the law allows companies to float their own trust to manage retirement savings of their employees. These trusts need to be registered with EPFO before they seek tax exemptions. The provision was introduced in 2006 when there were as many as 200 trusts which were operating without adequate regulation.

In the Budget, the tax department has been extending the deadline for the past several years but this time it could not do so as the government could not amend the Finance Act as part of the interim budget exercise. As a result, the extended run ends on March 31.

Officials said that the list of companies includes some of the biggest names in the corporate sector, multinationals as well as some government entities. These firms now have the option to complete the formalities over the next 40 days or let their employees be deprived of tax benefits. The law allows annual contribution of up to Rs 1 lakh to provident fund be exempt from tax.

A senior EPFO official said trusts started accepting money several years ago, including deposits, which they cannot do unless they are registered under the PF Act and with EPFO.

"The idea is to ensure that the investment pattern is followed and they are regulated. But several of them have cited various reasons to get an extension. Basically, they have been dragging their feet," the official said. Tax experts said that they expected the government to provide a further extension to enable the trusts to register with EPFO and also claim benefits from the I-T department.

But pending that, it would make sense for employees to check if the PF trust they are contributing to has received the all clear signal from EPFO as well as the tax department. In the absence of clearances it would make sense to put money in other instruments such as public provident fund to avail of the Rs 1 lakh exemption. Although companies have the flexibility to manage the PF contribution of their employees, they have to ensure that the returns offered by them at least match those given by EPFO on funds directly managed by it.