A structured retirement benefit program created for workers, a Provident Fund law, aims to support long-term financial security. It runs on a contributory basis whereby both the employer and employee regularly contribute to a specifically designated fund. Usually in Pakistan, these funds are set up in a trust and must be officially registered to become legally autonomous. We offer complete legal support for Provident Fund Trusts’ formation, registration, and regulatory compliance throughout Pakistan at SARDAR KHAN & CO.

Types of Provident Funds in Pakistan

There are three primary categories of Provident Funds recognised under Pakistani law:

1. Statutory Provident Fund

Founded under the Provident Fund Act of 1925, these monies are handled by local governments, semi-governmental institutions, and the Government. Income tax exempts withdrawals made from these funds; Commissioner of Inland Revenue permission is not necessary.

2. Recognised Provident Fund

Private sector institutions mostly keep these funds, which the Commissioner of Inland Revenue recognises under Part I of the Sixth Schedule to the Income Tax Ordinance, 2001. Tax exemptions for recognised fund contributions and accrued balances are dependent on adherence to legal criteria.

3. Unrecognised Provident Fund

Tax-exempt advantages are not available to such funds. Although annual contributions are not immediately taxed, the employer’s contributions and accrued interest become taxable when employees are compensated.

Establishment of a Provident Fund Trust

An irrevocable Trust set up by the employer produces a Provident Fund. Usually reflecting the company’s identity, the Trust name bears the words “Employees’ Contributory Provident Fund.”

Key Requirements:

• Appointment of at least three to five trustees
  
  
• Drafting of a Trust Deed on prescribed stamp paper
  
  
• Preparation of Provident Fund Trust Rules
  
  
• Registration with the relevant Trust Registrar
  

         The Trust Deed outlines:

• Administration and management structure
  
  
• Roles, powers, and responsibilities of trustees
  
  
• Rights and obligations of the employer and employees
  
  
• Contribution mechanisms
  
  
• Investment policies
  
  
• Profit distribution method
  
  
• Dispute resolution framework
  
  

Registration Procedure

The Trust Deed must be formally registered with the Registrar of Trusts. One trustee may be authorised to represent the Trust before the Registrar.

Required documentation generally includes:

• Original Trust Deed
  
  
• Copy of Trust Rules
  
  
• CNIC copies of the trustees
  
  
• Passport-size photographs of trustees
  
  

After registration:

• The Trust must obtain a National Tax Number (NTN)
  
  
• Trustees must also obtain individual NTNs
  
  

Recognition & Tax Exemption

To obtain tax benefits, the Trust must apply for recognition before the Commissioner of Inland Revenue under the Income Tax Ordinance, 2001.

Recognition conditions include:

• Employees must be employed in Pakistan or by a resident employer
  
  
• Employer’s contribution must not exceed employee’s contribution
  
  
• In case of non-resident employers, foreign-based employees must not exceed 10% of total employees
  
  

Once approved, the tax exemption remains valid for the lifetime of the Provident Fund, subject to continued compliance.

Contributions, Profit Distribution & Withdrawals

Each month, the employer and staff members contribute, which is then placed in approved instruments.

Annually, based on total balances, profits are distributed. For fairness, one should compute returns utilising average balances.

Members may be entitled to:

• Temporary loans
  
  
• Partial withdrawals under specified conditions
  
  
• Permanent withdrawals upon retirement or qualifying events
  
  

Loan limits and withdrawal rules are governed by the Trust Rules.

Investment of Provident Fund Assets

Investment rules differ depending on whether the employer is a company.

Where Employer is Not a Company

Investments must comply with Section 20 of the Trust Act, 1882 and may include:

• Government securities
  
  
• Post Office savings
  
  
• Bank deposits
  
  
• National Savings instruments
  
  
• Other approved financial institutions
  

Where Employer is a Company

Section 218 of the Companies Act, 2017, should guide investments. Investment discipline is also under the authority of the SECP’s Employees’ Contributory Funds (Investment in Listed Securities) Rules, 2018.

Companies are required to:

• Submit bi-annual financial statements of the Trust to SECP
  
  
• Ensure endorsement by the Head of Trustees
  
  
• File annual tax returns treating the Trust as a separate taxable entity
  

Punjab Trust Act, 2020 Compliance

Replaced the previous Trust Act framework, the Punjab Trust Act, 2020 replaces it in Punjab. Under Section 112(4), trusts formerly registered under the Trust Act, 1882, have to be re-registered under the revised law within the stipulated time.

Legal legitimacy depends on compliance with this revised law.

Our Provident Fund Legal Services

For the creation and administration of Provident Fund Trusts in Pakistan, SARDAR KHAN & CO offers full legal assistance. Drafting Provident Fund Trust Deeds, creating thorough Provident Fund Rules, assisting in trust registration, getting National Tax Numbers (NTN), and managing tax recognition and exclusion applications before the proper authorities are among our offerings.

We additionally offer guidance on SECP compliance regulations and support regulatory revision consistent with newly revised rules. Our goal is to protect both employees’ and employers’ legal and financial interests while guaranteeing entire legislative compliance.