Tax Department lowers investment bar for recognised PFs; could prove risky, say experts

Shishir Sinha New Delhi. October 23 | Updated on October 23, 2020 Published on October 23, 2020

The Central Board of Direct Taxes (CBDT) has allowed recognised provident fund trusts to invest in lower-rated instruments. The new norms will come into effect on April 1, 2021. Experts fear such a move could be riskier for PF subscribers.

In an October 22 notification, the Board said ‘AA’ will be substituted by ‘A’ in three provisos of sub rule (2) of Rule 67 of the Income Tax Rules, 1962. Sources said the Department of Economic Affairs prescribed the change and for the purpose of taxability, the CBDT has notified the lower rating for investment instruments.

‘AA’ rated securities are less risky than ‘A’ rated ones. This change would lead to investment of PF monies in securities that hitherto were not permitted.

Recognised PFs can invest at least 35 per cent of the “investible fund” (other than that parked with post-office or commercial banks), which can go up to 45 per cent.

Rule 67 prescribes norms for investment by recognised PFs in various instruments. Such funds operate under a scheme applicable to an organisation having 20 or more employees. Such an organisation has two options — go for the government approved scheme (Employee Provident Fund by the Labour Ministry) or a scheme to be operated by employees through a trust. For getting government recognition, this needs to be approved by the Income Tax Commissioner, following which tax benefits will be available.

For such a fund, as of now, Rule 67 prescribes investment in various instruments with minimum ‘AA’ rating. The amendment allows investment in securities with single rating of ‘A’ or above by a domestic or an international rating agency.

“Allowing PF monies in riskier securities is a major change in position because PF monies are sacrosanct,” said Sonu Iyer, Tax Partner & National Leader, People Advisory Services at EY India.

According to various provisos related with sub rule (2) of Rule 67, investment instruments include rupee bonds having an outstanding maturity of at least three years issued by institutions of the International Bank for Reconstruction and Development, International Finance Corporation and Asian Development Bank. These also include listed debt securities issued by body corporates, including banks and public financial institutions, which have a minimum residual maturity period of three years from the date of investment beside Basel III Tier-I bonds issued by scheduled commercial banks.

Other instruments are listed debt securities issued by body corporates engaged mainly in the business of development or operation and maintenance of infrastructure, or development, construction or finance of low-cost housing.

These include securities issued by the Indian Railways, infrastructure and affordable housing bonds issued by any scheduled commercial bank, listed securities issued by infrastructure debt funds operating as an NBFC and listed units issued by infrastructure debt funds operating as mutual funds.

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Published on October 23, 2020
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