Provident Funds

Beyond conventional ideas of a unilateral employer-employee relation, the connection between business owners and their employees has developed in the changing terrain of the modern workplace. Businesses, at an increasing rate, are beginning to understand how crucial it is to have a mutual beneficial partnership that puts employees’ growth and well-being above all whilst also focusing on the overall growth of the company. Indeed, this symbiotic relationship between the company and their employees has brought forth myriads of advantages for the employees including professional advancement, balanced work-life, medical and life insurances and even financial stability after retirement.  In terms of financial stability of the employee, provident fund plays a vital role. It provides an umbrella of protection that lasts beyond their active employment.

Provident funds, also commonly referred as ‘retirement savings plans’, plays a very important role in creating a financial safety net for the employees who retired from active employment after providing years of successful service to the company. Typically, the company create this fund where the company pay a percentage of the employees’ salary to the fund and the employee on the other hand may make contributions to the fund with an aim to generate a substantial amount of fund while they retire.

The assurance of financial security after the retirement when the employees are usually old and weak, is one of the main advantages that draws the employees towards the companies which have settled a provident fund for their employees. Over the years of their active employments to the company, the fund increases gradually and harvest a good fortune when they retire which makes them feel at ease and relaxed regarding post-retirement costs and expenses.

These funds often enjoy tax benefits for both the companies and the employees. Contributions made to provident funds by the employees are usually tax deductible which provides an extra incentive for the employees to take part and contribute more to the fund. More interestingly, this tax efficiency serves as an added perk for the workers which allows them to save to the maximum extent possible whilst enjoying their reduced taxable income.

Types of Provident Funds:

As per the current laws of Bangladesh, provident fund is not mandatory for the employers. It is a voluntary or discretional investment which is cooperatively contributed by the company and the employees of the company to provide a longstanding savings to assist the employees after the termination of their employment. There are two forms of provident funds and the employer could opt any one of them in accordance with his needs.

1. Registered Provident Funds: The fund is created with a trustee board and compulsorily be registered with the National Board of Revenue, the apex authority for tax administration in Bangladesh. Registered provident funds, under the provisions of Income Tax Ordinance 1984, are facilitated with tax benefits from both company and employees’ aspects, such as: 

1. Employees’ contributions to the registered provident funds are treated as a qualified investment for tax credit.
2. Under 1st Schedule Part B, Paragraph 6 of Income Tax Ordinance 1984, if an employee works for more than 5 years under the same company, any accrued provident fund balance payable at the end of his employment would be deemed exempt from income tax.
3. Under a registered provident fund, the employer’s contribution to the registered provident fund could be deducted from the employer’s annual income, in other words, the employer would not be liable for tax for the contribution they make to the registered provident fund.

1. Unregistered Provident Funds: As the name states, this type of provident fund is not registered with the National Board of Revenue, the apex authority for tax administration in Bangladesh. This is an internal fund which is exclusively supervised and controlled by the employer and there are no tax incentives whatsoever neither for the employer nor the employee.

Prerequisites to be fulfilled by the registered provident fund: 

In order to register and retain registration the provident fund should must fulfill the following conditions:

1. The place of work of the employees must be in Bangladesh or if it is outside of Bangladesh, they should be employed by an employer whose principal place of business is in Bangladesh.
2. The Commissioner of the National Board of Revenue, has the absolute discretion to accord recognition to a fund whose principal place of business is outside of Bangladesh provided that not more than 10 percent of the total employees of the company are employed outside of Bangladesh.
3. The contribution of the employee in any given year shall be a certain percentage of his salary for that year and that percentage should be deducted from his periodical salary payments and credited to his personal account in the fund.
4. Two or more trustees or in the official trustee should control and manage the provident fund under an irrevocable trust, which could only be rescinded by the consents of all the beneficiaries, i.e., the employees.
5. The employer could not reclaim any amount of money he contributed to the fund except in cases where the employment of the employee is terminated due to his malfeasance or malpractice, or he himself willingly renounce his employment for reasons other than sickness or inevitable circumstances before the completion of the specified duration of the contract stipulated in the regulations of the fund. Nevertheless, in that circumstances the employer could only recover the contributions they made directly into the accounts of that individual employee in consort with any interest accrued on those contributions according to the regulations of the fund.
6. The accumulated balance due to the employee should be payable immediately on the day his employment under the employer is terminated.
7. As long as the total of all contributions made to a recognised provident fund in a given year does not surpass one-third of the employee’s wage for that year, the employee will not be required to pay taxes on contributions made to his individual account in the fund. 
8. Interest credited to an employee’s accumulated balance in a recognised provident fund is exempt from taxation, provided that it does not exceed one-third of the employee’s salary for the relevant year and, to the extent permitted, at a rate not to exceed that which the Board may fix by notification in the official Gazette.

Setting Up of the provident fund:

The provident fund laws are stipulated in Labour Act 2006 and Labour Rules 2015. Reading in conjunction of these laws, it is understood that both the employees and the employer require to contribute an equivalent sum to the provident fund. A provident fund, not a pension fund, which is very beneficial to the private companies, serves as the financial security when the active employment of an employee comes to an end. As per s.264, Labour Act 2006, at first, the company must set up a broad of trustees comprising equal number of representatives from employer and employees. It is then upon the head of trustees to perform the required activities, which are discussed below in brief.

Documents required for setting up a provident fund:

1. Trade Licence.
2. TIN Certificate.
3. Board Resolution.
4. Photographs of signatories.
5. Government issued IDs, e.g., National ID, Passport, Driving Licence.
6. Trust Deed.
7. Provident fund trust rules.
8. NBR Certificates.
9. Memorandum and Articles of Association (MOA & AOA).
10. Certificate of Incorporation.

1. Step 1: In order to contribute and be benefitted, an employee should be a permanent employee of the company, (temporary workers are not eligible for provident funds contribution). A permanent employee, upon successful completion of one year of employment, shall take part in the provident fund scheme, and the contribution should be any sum in between 7% and 8% of his basic salary as per s.264(9) Labour Act 2006 and the employer should also contribute the equivalent sum to the fund. However, the trustees have the discretion to appoint any percentage they deem feasible, but that percentage could not be detrimental to the employees nor be less than the legal guidance provided in the Labour Act 2006. 

1. Step 2: The head of the trustees needs to submit an application form to the Commissioner of NBR in writing along with the aforementioned documents. Upon receiving the application, the Commissioner would grant recognition to the provident fund within forty-five days from the date of submission of the application. If the Commissioner fails to grant recognition for any reason, the fund would be considered recognised after 45 days. However, if the fund rules breach any conditions stipulated in paragraph 3 or any other rules and regulations specified by NBR itself, the Commissioner has the right to revoke the recognition at any moment.

1. Step 3: The order issued by the Commissioner granting recognition should come into force on the date specified by the Commissioner, however, the date could not be later than the last day of the financial year in which the Commissioner issued the order. The order would remain effective even if there is a fundamental change, for instance, the fund merges with another fund, or absorbs another fund from a transferred or merged undertaking, so long as the Commissioner does not rescind the order. An order to rescind the recognition should take effect immediately, on the date it was issued. However, before rescinding the recognition, the Commissioner must give the trustees a reasonable time and opportunity for a formal hearing at the Commissioner’s office.

Yearly Compliance:

Under s.14, Labour Act 2006, the authority of the fund must conduct an annual audit which covers the income and expenditures. The annual financial audit for both the provident funds and the business itself, is very important for multiple reasons for example, the audit assists the business to achieve its goal, prevents from suspicious transactions, and increases its sustainability of the fund. Furthermore, the audit of the provident fund reinsures the tax exemption for both the employer and the employees.

New Updates:

Albeit, the provident funds were exempted from tax, the new laws under the Income Tax Act 2023, imposed a 30% (27.5%, if certain conditions are fulfilled) tax is imposed on the provident fund. However, in December 2023, the National Board of Revenue, the supreme authority on tax administration has reduced the rate to a flat 15% on all sorts of income generated by provident fund, gratuity fund, and pension funds. This new Act generated effusive reprimand regarding the lifting of tax exemption on the provident funds, gratuity funds and employees’ profit participation in the private sectors, albeit the government regulated provident funds are out of scope of the new Act. Section 166(1) of the Income Tax Act 2023 listed out the entities who must submit tax returns and section 166(2) listed out those who do not have to submit the tax returns.

How Bangladesh Consultant Can help?

Registration Process: Bangladesh Consultant’s expert team would organise all the necessary documents and fill out the application forms and records required for registering the provident fund with the National Board of Revenue (NBR)

Preparing the Memorandum: We would provide support and guidance in preparing the memorandum which would outline the rules and the regulations regarding the management of the fund and its operation.

Tax Enrollment & Statutory Audit: Our team of expert auditors would facilitate the enrollment with the NBR and conduct a full audit of the funds which would be clean, official and ready for submission at the NBR.

Fund Administration: We would oversee specific aspects of the fund which would include monthly contributions and performance of the fund.

Secretarial Services: We would prepare financial statements time to time as per your request to submit to the members and carry out all sorts of correspondences with the relevant authorities on provident fund related issues.