The Central Board of Direct Taxes (CBDT) has lowered the investment bar for recognized PF trusts, allowing them to invest in lower-rated instruments. These new norms will come into effect on April 1, 2021. In a recent notification, the Board told that the ‘AA’ rated securities would be substituted by the ‘A’ rated ones in three provisos of sub-rule (2) of Rule 67 of the Income Tax Rules, 1962. The Experts fear that this move may prove to be riskier for PF subscribers, as ‘AA’ rated securities are less risky than ‘A’ rated ones.

This change would lead to investment in securities that were earlier not permitted. Recognized PFs can invest at least 35% of the investible funds and can go up to 45%, excluding those that are parked with post-office or commercial banks. To understand the impact of this decision, we will need to understand income tax rule 67. Rule 67 prescribes norms for investment by recognized PFs in various instruments. These funds operate under a scheme applicable to an organization having a minimum of 20 employees. Such organizations have two options. The first one is to go for the government-approved schemes such as Employee Provident Fund. The second option is to go for a PF scheme operated by employees through a trust. For the PFs to get government recognition, it needs to be approved by the Income Tax Commissioner. For such funds, as of now, Rule 67 prescribes investment in various instruments with a minimum ‘AA’ rating, this amendment will allow investment in securities with an 'A' rating by a domestic or international rating agency.

According to Sonu Iyer, Tax Partner & National Leader, and People Advisory Services at EY India, allowing the PF monies in riskier securities is a major change in position because PF monies are sacrosanct.