The Income Tax department has allowed recognised provident funds to invest in 'A' or higher-rated debt securities, a move which will give them the flexibility to retain their current investments in bonds even where such papers have been downgraded. Earlier, recognised employees provident fund trusts were required to invest in securities having 'AA' and above rating.
The Central Board of Direct Taxes (CBDT), in a notification dated October 22, has amended Income Tax rules allowing recognised PF trusts to invest in 'A' or above-rated securities in 2020-21 fiscal.
Currently, in order to be treated as a recognised employee provident funds, such funds are required to invest 45-55 per cent of its fund in Government Securities, 35-45 per cent in debt (bonds and term deposits), 0-5 per cent in short term debt (money market, liquid funds), 5-15 per cent in equity, asset-backed securities (units of REITS, InVITs) 0-5 per cent.
The CBDT has now amended I-T rules, thereby diluting norms for investment purposes to bonds with minimum 'A' rating, as against the earlier requirement of 'AA' rating.
Nangia Andersen LLP Partner Sunil Gidwani said, "Since the current situation and stress on liquidity and profitability has resulted in downgrade of several debt papers by rating agencies, the relaxation in the PF fund rules will provide flexibility to retain their current investments in bonds even where such papers have been downgraded".
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