CA Vinamar Gupta
Scheme of Taxation for Provident Funds, Approved Super Annuation Funds and New Pension Fund revisited after amendments proposed in Finance Bill 2016
Feb 2016 witnessed a few important changes for salaried class assessee enjoying their provident fund bounties. While vide Government Notification dated 10-02-2016 withdrawal of employer contributions till 58 years of age was prohibited, Finance Bill 2016 created mayhem over taxability on withdrawal of entire provident fund accumulations. The amendment was made to move to the regime of EET (i.e. Exempt, Exempt, Tax) from present regime of (Exempt, Exempt and Exempt). Although Finance Minister has announced the retraction of its proposal to tax provident fund withdrawal, there are other large number of other amendments also with regard to employee benefits, which have gone unnoticed in this buzz.
In this article an attempt has been made to discuss the taxability of provident funds, approved superannuation funds and new pension scheme after taking into account the amendments proposed by Finance Bill 2016. The taxability of each of these employee benefit scheme has been discussed with regard to employee contributions, employer contributions and treatment on maturity/withdrawal.
What is Recognised Provident Fund ?
As per Section 2(38) “recognised provident fund” means a provident fund which has been and continues to be recognised by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part A of the Fourth Schedule, and includes a provident fund established under a scheme framed under the Employees’ Provident Funds Act, 1952 (19 of 1952)
a) Taxability of Employees Contribution to Recognized Provident Fund
i) As per Rule 7 of Schedule IV-A
An employee participating in a recognised provident fund shall, in respect of his own contributions to his individual account in the fund in the previous year, be entitled to a deduction in the computation of his total income of an amount determined in accordance with section 80C
ii) Under Section 80C(2)(vi), there is deduction for contribution by an employee to a recognised provident fund. Contributions by government employees under Provident Fund Act 1925 is eligible for deduction u/s 80C(2)(iv). Contribution to Public Provident Fund under PPF Act 1968 is eligible for deduction u/s 80C(2)(v) rws 80C(4) whether made in name of assessee or spouse or child. Deduction u/s 80C is available up to Rs. 150000. Hence no deduction for contributions exceeding Rs. 150000/-. No deduction u/s 80C is available for contribution to unrecognized provident fund.
b) Taxability of Employer’s Contribution to Recognized Provident Fund
i) As per Section 7 the annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule shall be deemed to be income received by employee
ii) Extent of Employer’s annual contributions deemed to be income received by employee as per Rule 6 of Schedule IV-A
That portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund as consists of—
(a) contributions made by the employer in excess of twelve per cent of the salary of the employee [or Rs. 1,50,000 whichever is less was proposed to be inserted Wef AY 2017-18 has been rolled back],
Note : Finance Bill 2016 therefore proposed to tax employer’s contribution to recognized provident fund in excess of Rs. 1,50,000 . Hence employees whose salary exceeded Rs. 12,50,000 would have been effected by this amendment. [150000 x (12/100)=1250000]. However this proposal has also been rolled back .
(b) interest credited on the balance to the credit of the employee in so far as it is allowed at a rate exceeding such rate as may be fixed by the Central Government in this behalf by notification in the Official Gazette,
[Rate fixed is 9.5% w.e.f. 1-9-2010 – Notification No. SO 1046(E), dated 13-5-2011.]
shall be deemed to have been received by the employee in that previous year and shall be included in his total income for that previous year, and shall be liable to income-tax .
iii) Head of Income for taxability of Employers’ Contribution
The annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule shall be chargeable as salary as per Section 17(1)(vi)
iv) In case of statutory provident funds and unrecognized provident funds, contribution of employer is not treated as income received.
c) Taxability of Withdrawls of Accumulated Balance from Recognized Provident Fund
i) As per section 10(12) the accumulated balance due and becoming payable to an employee participating in a recognized provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule is exempt
Amendment Proposed in Finance Bill 2016 but dropped by Finance Minister
Provided that nothing contained in this clause shall apply in respect of any amount of accumulated balance, attributable to any contributions made on or after the 1st day of April, 2016 by an employee other than an excluded employee, exceeding forty per cent. of such accumulated balance due and payable in accordance with provisions of rule 8 of Part A of the Fourth Schedule.
Explanation.—For the purposes of this clause, the term “excluded employee” means an employee whose monthly salary does not exceed such amount, as may be prescribed;’;
ii) Extent of Withdrawl from recognized provident fund as per Rule 8 Schedule IV-A
The accumulated balance due and becoming payable to an employee participating in a recognized provident fund shall be excluded from the computation of his total income—
(i) if he has rendered continuous service with his employer for a period of five years or more, or
(ii) if, though he has not rendered such continuous service, the service has been terminated by reason of the employee’s ill-health, or by the contraction or discontinuance of the employer’s business or other cause beyond the control of the employee, [or]
[(iii) if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer
.iv) if the entire balance standing to the credit of the employee is transferred to his account under a pension scheme referred to in section 80CCD and notified by the Central Government (Inserted by Finance Bill wef AY 2017-18)
Explanation.—Where the accumulated balance due and becoming payable to an employee participating in a recognised provident fund maintained by his employer includes any amount transferred from his individual account in any other recognised provident fund or funds maintained by his former employer or employers, then, in computing the period of continuous service for the purposes of clause (i) or clause (ii) the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall be included.]
iii) Calculation of Tax on premature withdrawl of accumulated balance.as per Rule 9 of Schedule IV-A
Where the accumulated balance due to an employee participating in a recognised provident fund is included in his total income owing to the provi-sions of rule 8 not being applicable, the Assessing Officer shall calculate the total of the various sums of tax which would have been payable by the emp-loyee in respect of his total income for each of the years concerned if the fund had not been a recognised provident fund, and the amount by which such total exceeds the total of all sums paid by or on behalf of such employee by way of tax for such years shall be payable by the employee in addition to any other [tax] for which he may be liable for the previous year in which the accumulated balance due to him becomes payable.
Note: It means that tax shall be computed for respective years without giving effect to deduction for contribution to EPF under section 80C.
Iv ) Deduction at source of tax payable on accumulated balance as per Rule 10 of Sch IV-A.
The trustees of a recognised provident fund, or any person authorised by the regulations of the fund to make payment of accumulated balances due to employees, shall, in cases where sub-rule (1) of rule 9 applies, at the time an accumulated balance due to an employee is paid, deduct therefrom the amount payable under that rule and all the provisions of Chapter XVII-B shall apply as if the accumulated balance were income chargeable under the head “Salaries”.
v) TDS on Payment of accumulated balance due to an employee.As per Section 192A inserted wef 01-06-2015
Notwithstanding anything contained in this Act, the trustees of the Employees’ Provident Fund Scheme, 1952, framed under section 5 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952) or any person authorised under the scheme to make payment of accumulated balance due to employees, shall, in a case where the accumulated balance due to an employee participating in a recognised provident fund is includible in his total income owing to the provisions of rule 8 of Part A of the Fourth Schedule not being applicable, at the time of payment of the accumulated balance due to the employee, deduct income-tax thereon at the rate of ten per cent :
Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payment to the payee is less than thirty thousand rupees:
Provided further that any person entitled to receive any amount on which tax is deductible under this section shall furnish his Permanent Account Number to the person responsible for deducting such tax, failing which tax shall be deducted at the maximum marginal rate.
vi) Facility of Form 15G/15H
However wef 01-06-2015, the assessee can file form 15G if total income including premature withdrawl of PF abalance does not exceed exemption limit. Senior Citizens can file Form 15H where tax payable is NIL even after inclusion of premature withdrawl of PF balance
vii) In case of Unrecognized provident Fund or Withdrawal from provident fund with in five years as per Section 17(3)
Section 17(3) is applicable to payments other than covered by S.10(12). Section 10(12) applies to accumulated balance due or payable to employee participating in recognized provident fund to the extent provided in Rule 8 of Schecule IV-A. Hence section 17(3) shall apply to following situations:
1) Amount becoming due or payable from unrecognized provident fund
2) Amount from recognized provident fund not covered by Rule 8 of SCh-IV-A
As per Section 17(3) profits in lieu of salary” includes any payment (other than any payment referred to in clause(12) of Section 10) due to or received by an assessee from an employer or a former employer or from a provident or other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions
viii) Withdrawl from Stautory Provident Fund for Government Employees or Public Provident Fund
As per Section 10(11) any payment from provident Fund to which provident Fund Act 1925 applies [It applies to Government Employees] or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette i.e. Public Provident Fund under PPF Scheme 1968 is exempt from tax.
What is Approved Super Annuation Fund:?
As per section 2(6) “approved superannuation fund” means a superannuation fund or any part of a superannuation fund which has been and continues to be approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part B of the Fourth Schedule
a) Contribution by an employee to an approved superannuation fund
U/s 80C(2)(vii) deduction up to Rs. 150000 is available for contribution to approved superannuation fund.
b) Taxability of Employer’s Contribution to approved superannuation Fund
As per Section 17(2) The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees is chargeable as perquisites
The Limit being enhanced to Rs.1.50 lacs wef AY 2017-18 to bring parity with section 80C.
c) Withdrawal from approved Superannuation Fund
Section 10(13) exempts any payment from an approved superannuation fund made—
(i) on the death of a beneficiary ; or
(ii) to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement ; or
(iii) by way of refund of contributions on the death of a beneficiary ; or
(iv) by way of refund of contributions to an employee on his leaving the service in connection with which the fund is established otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement, to the extent to which such payment does not exceed the contributions made prior to the commencement of this Act and any interest thereon
Amendment Proposed wef AY 2017-18
Section 10(13) further proposes to exempt transfer to the account of the employee under a pension scheme referred to in section 80-CCD and notified by the Central Government
60% of Commuted annuity in respect contribution after 01-04-2016 made taxable by adding proviso
Provided that any payment in lieu of or in commutation of an annuity purchased out of contributions made on or after the 1st day of April, 2016, where it exceeds forty per cent. of the annuity, shall be taken into account in computing the total income;
Where an assessee, being an individual employed by the Central Government on or after the 1st day of January, 2004 or,
being an individual employed by any other employer,
or any other assessee, being an individual]
has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed,—
(a) in the case of an employee, ten per cent of his salary in the previous year; and
(b) in any other case, ten per cent of his gross total income in the previous year.]
[(1A) The amount of deduction under sub-section (1) shall not exceed one hundred thousand rupees.]Omitted by Finance Act 2015
Following sub-section (1B) has been inserted after sub-section (1A) of section 80CCD by the Finance Act, 2015, w.e.f. 1-4-2016 :
(1B) An assessee referred to in sub-section (1), shall be allowed a deduction in computation of his total income, [whether or not any deduction is allowed under sub-section (1)], of the whole of the amount paid or deposited in the previous year in his account under a pension scheme notified or as may be notified by the Central Government, which shall not exceed fifty thousand rupees:
Provided that no deduction under this sub-section shall be allowed in respect of the amount on which a deduction has been claimed and allowed under sub-section (1).
b) Employer’s Contribution
80CCD(2) Where, in the case of an assessee referred to in sub-section (1), the Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer as does not exceed ten per cent of his salary in the previous year.
Note: As per Section 7(iii) the contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD is deemed to be income received Further As per Section 17(1)(viii) salary includes the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD;
Hence Contributions by employer in excess of 10% shall become taxable.
c) Taxability of Withdrawal/Maturity
80CCD(3) Where any amount standing to the credit of the assessee in his account referred to in sub-section (1) or sub-section (1B), in respect of which a deduction has been allowed under that sub-section or sub-section (2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year,—
(a) on account of closure or his opting out of the pension scheme referred to in sub-section (1) or sub-section (1B); or
(b) as pension received from the annuity plan purchased or taken on such closure or opting out,
the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year.
Following proviso proposed to be inserted wef AY 2017-18
Provided that the amount received by the nominee, on the death of the assessee, under the circumstances referred to in clause (a), shall not be deemed to be the income of the nominee
Conversion into Annuity Plan
(5) For the purposes of this section, the assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year.
40% Receipts from New Pension Scheme Exempted by inserting clause 10(12A) wef AY 2017-18 as under:
(12A) any payment from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent. of the total amount payable to him at the time of such closure or his opting out of the scheme;”;
Explanation.—For the purposes of this section, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
Conclusion: 60% of Withdrawl from recognized provident fund sought to be taxed by Finance Bill 2016 has been dropped and hence shall continue to enjoy tax exempt status. Employer’s contribution to recognized fund in excess of Rs. 150000 was also proposed to be taxed has also been rolled back. Employer’s Contribution to approved superannuation fund has been exempted till Rs. 150000 to bring it in parity with deduction for employees contribution. In investment in New Pension Scheme also still there is no cap for exemption in absolute terms of monetary limit except percentage limit of 10%. While conversion from new pension scheme to annuity was already tax exempt, the conversion from recognized provident fund and approved superannuation fund to new pension scheme has also been exempted. 40% of amount receivable under new pension scheme and commuted annuity is also proposed to be exempted from tax. Amount received by nominee under new pension scheme on death of the contributor has been provided albeit exemption. Contributors of New Pension scheme already enjoys the benefit of additional deduction of Rs. 50,000/- u/s 80CCD(1B) over and above normal aggregate deduction of Rs. 150000 u/s 80C and 80CCD(1).