Exempted Provident Fund Trusts (EPFTs), established under Section 17 of the EPF Act, once symbolised financial autonomy and governance sophistication among India’s top employers. For years, large corporations preferred managing their provident fund contributions, aiming to offer superior returns and greater flexibility while adhering to regulatory standards.

However, the landscape is shifting. Rising compliance costs, stricter oversight, and the growing demand for digital parity with EPFO’s systems have made in-house fund management increasingly complex. Simultaneously, employees, especially in a mobile, tech-savvy workforce, are voicing concerns over the lack of transparency, delayed transfers, and limited access to real-time account information.

With both financial and reputational risks escalating, many employers are reconsidering the viability of exempted trusts. The pressing question now is whether continued autonomy justifies the operational burden or if transitioning back to EPFO offers a more secure and sustainable path forward.

India’s Provident Fund system functions under a dual structure: the centralised EPFO regime and the Exempted Provident Fund Trust (EPFT) model. Both secure employee retirement savings but differ in operational control and compliance obligations.

The EPFO, under the Ministry of Labour and Employment, administers the EPF, EPS, and EDLI schemes. Under Section 17 of the EPF Act, eligible employers may establish their own trust if they offer benefits not less favourable than EPFO.

Exempted trusts must match or exceed EPFO’s declared interest rate. While they manage the PF corpus internally, pension contributions (8.67%) continue with EPFO, and EDLI typically remains under the statutory scheme.

Despite operational autonomy, these trusts are bound by stringent compliance: annual audits, prescribed investment norms, and regular filings. Thus, while they offer flexibility in fund management, exempted trusts remain under close regulatory scrutiny to safeguard employee interests.

Exempted Provident Fund Trusts give employers autonomy in managing retirement funds, but this comes with strict financial and regulatory obligations, especially around investment compliance and return assurance.

As per the Ministry of Labour guidelines, trusts must invest at least 85% of their corpus in government-approved debt instruments and may invest up to 15% in equities under stringent conditions. These conservative norms prioritise safety but restrict yield, especially in prolonged low-interest environments.

Trusts are mandated to match or exceed EPFO’s annual interest rate (typically 8.0–8.7%). In recent years, achieving this has become difficult, forcing employers to cover shortfalls from their balance sheets.

Even credit-compliant investments have led to defaults, as seen in the IL&FS and DHFL cases, causing unexpected losses. For large corporates, bridging underperformance can cost crores annually, turning what was once a cost-effective exemption into a recurring financial burden.

As EPFO scales up its digital services, real-time passbook access, e-nomination, mobile alerts, and online grievance redressal, many Exempted Provident Fund Trusts are falling behind. These trusts often rely on manual processes, outdated software, and fragmented systems with limited integration across HR, payroll, and finance.

This mismatch creates inconsistent experiences for employees, especially those accustomed to EPFO’s seamless platform. The gap is wider in organisations lacking robust HR tech infrastructure, where tracking contributions, maintaining records, and meeting audit requirements becomes a challenge.

Employee frustration is growing due to missing statements, unclear interest postings, and poor redressal mechanisms. In large or merged entities, digitising legacy records frequently exposes data inconsistencies and compliance gaps.

This divide is more than just a tech issue—it’s a strategic liability. For many employers, the question is no longer how to modernise the trust, but whether it’s worth continuing it at all.

What was once seen as a mark of employer-led financial maturity, the Exempted Provident Fund Trust is increasingly becoming a source of regulatory fatigue and reputational risk. A growing number of companies are now seeking to surrender their exempt status and return to EPFO, citing rising compliance costs, operational complexity, and employee discontent. But this “return” is neither simple nor uniformly executed.

Why are Companies Opting Out?

The motivations are clear and recurring:

- Inability to match EPFO-declared interest rates amid low-yield markets.

- Growing burden of maintaining digitisation and transparency standards.

- Pressure from employees seeking real-time PF access, mobile dashboards, and grievance redressal.

- Exposure to reputational and financial risks in the event of audit failures or delayed settlements.

Though EPFO released a Standard Operating Procedure (SOP) in October 2023 to standardise trust surrender, implementation on the ground remains inconsistent across Regional Offices. Clearly defined timelines are often undermined by discretionary interpretations.

For instance, a regional officer may demand third-party audit completion before approving surrender, despite the SOP allowing parallel processing. Some offices require corpus transfers via demand draft, even though online banking is explicitly permitted. Securing employee consent also varies; some demand consent from every employee, while others accept a trustees’ resolution. These discrepancies create significant hurdles for large employers managing vast employee bases.

Such discretionary interpretations arise at nearly every stage of the SOP process, resulting in unpredictable delays, added compliance burdens, and operational uncertainty. For companies seeking to return to EPFO, the gap between policy and execution makes the transition complex and costly, highlighting the urgent need for unified enforcement and accountability mechanisms.

Even after companies are permitted to exit the exempted trust model, integration into EPFO systems can take 8–10 months. Employees often face delayed access to PF balances, withdrawal challenges, and potential tax issues. Procedural disputes between employers and EPFO over compliance add further complexity.

Organisations operating across multiple locations encounter varied SOP interpretations from regional EPFO offices, compounding delays. In one case, a corporation with 10,000+ employees and a ₹1,000+ crore corpus experienced over a year of uncertainty during transition. Employees had limited visibility into their funds until senior intervention from EPFO’s Central Office resolved the matter.

With over 1,000 such establishments potentially seeking de-exemption, the current ad-hoc approach risks systemic disruption. There is a clear need for uniform policies and streamlined processes to ensure smoother transitions—for corporates, unions, and employees alike—, turning what is currently friction into a coordinated, future-ready reform movement.

The burden doesn’t end with paperwork. Employers must:

- Manage two systems during the transition,

- Address a surge in employee grievances, and

- Communicate benefit continuity clearly

With more organisations opting to exit the exempted trust model, calls for a streamlined and transparent regulatory framework are growing. Industry bodies, HR leaders, and legal professionals have flagged inconsistent regional practices, outdated audit protocols, and legacy data issues as key barriers to a smooth transition back to EPFO.

These challenges have prompted engagement with the Ministry of Labour and Employment and EPFO to seek formalised SOPs, predictable timelines, and clarity on post-surrender obligations. Stakeholders are pushing for reforms that align with today’s workforce realities.

Key recommendations include:

- Dedicated EPFO cells for surrender processing

- Digital audit systems over manual reconciliations

- Clear guidance for managing dual systems during migration

Some propose hybrid models, phased exits, and simplified digital trails—especially for large employers with long trust histories. As India digitises its social security ecosystem, regulatory reforms must ensure administrative ease for employers and sustained trust for employees.

The exempted trust model, once a mark of corporate maturity, is now grappling with rising compliance costs, operational burdens, and growing employee dissatisfaction. In an era where digital transparency and systemic reliability are paramount, its long-term viability is in question.

As more companies seek to return to EPFO, the need for clearer policies, simplified transition frameworks, and flexible regulatory options has never been greater. Striking the right balance between employer autonomy and employee protection is essential to building a provident fund system that is future-ready and trustworthy.

About the author: Madhu Damodaran is the Regional Managing Partner at AMLEGALS.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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