#Budget 2016-  Rationalisation of tax treatment of Recognised Provident Funds, Pension Funds and National Pension Scheme

Under the existing provisions of the Income-tax Act, tax treatment for the National Pension System (NPS) referred to in section 80CCD is Exempt, Exempt and Tax (EET) i.e., the monthly/periodic contributions during the pension accumulation phase are allowed as deduction from income for tax purposes; the returns generated on these contributions during the accumulation phase are also exempt from tax; however, the terminal benefits on exit or superannuation, in the form of lump sum withdrawals, are taxable in the hands of the individual subscriber or his nominee in the year of receipt of such amounts.

However, commutation of Government Pension and superannuation fund is exempt from taxation. The monthly contribution, annual accrued income, advances/ withdrawals for specific purposes and final withdrawal from the Recognised Provident Funds (RPFs) on superannuation are also accorded EEE status i.e. Exempt, Exempt, Exempt.

In order to bring greater parity in tax treatment of different types of pension plans, it is proposed to amend section 10 so as to provide that in respect of the contributions made on or after the 1stday of April, 2016 by an employee participating in a recognised provident fund and superannuation fund, up to 40 % of the accumulated balance attributable to such contributions on withdrawal shall be exempt from tax.

Under the existing provisions, any payment from an approved superannuation fund made 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 is exempt from tax.

It is proposed to amend the said provisions so as to provide that any payment in commutation of an annuity purchased out of contributions made on or after the 1st day of April, 2016, which exceeds forty per cent of the annuity, shall be chargeable to tax.

Under the existing provisions of section 80CCD, any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme is chargeable to tax.

It is proposed to provide that any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme referred to in Section 80CCD, to the extent it does not exceed forty percent of the total amount payable to him at the time of closure or his opting out of the scheme, shall be exempt from tax. However, the whole amount received by the nominee, on death of the assessee shall be exempt from tax.

Under section 17, perquisite includes the amount of any contribution exceeding one lakh rupees to an approved superannuation fund by the employer in the hands of the assessee.

Under the Part A of Fourth Schedule to the Income-tax Act contributions made by employer to the credit of an employee participating in a recognised provident fund, which are in excess of twelve percent of the salary of the employee, are liable to tax in the hands of the employee. However, there is no monetary limit for the contribution made by the employer though there is a monetary ceiling for employee’s contribution.

The limit of contribution by the employee eligible under section 80C of the Act has been increased from one lakh rupees to one lakh and fifty thousand rupees vide Finance Act(No.2), 2014. Therefore, in order to bring parity in the monetary limit for contribution by the employer and the employee, it is proposed to amend the said section and said schedule so as to provide the limit of employer’s contribution to one lakh and fifty thousand rupees, without attracting tax.

Further with a view to bring all the pension plans under one umberalla, it is also proposed to amend:-

  • the said schedule so as to provide exemption to one-time portability from a recognised provident fund to National Pension System;
  • clause (13) of section 10 so as to provide that any payment from an approved superannuation fund by way of transfer to the account of the employee under NPS referred to in section 80CCD and notified by the Central Government shall be exempt from tax.

These amendments are proposed to be made effective from the 1st day of April, 2017 and shall accordingly apply in relation to assessment year 2017-18 and subsequent years.

Clause 7 To Finance Bill 2016

Clause 7 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.

Sub-clause (A) of the said clause seeks to amend clause (12) of the aforesaid section.

The said clause provides that the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, is exempt from tax, subject to fulfilment of certain conditions specified in rule 8 of Part A of the Fourth Schedule.

It is proposed to amend the said clause (12) so as to provide 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.

It is further proposed to insert a new clause (12A) in the said section so as to provide that any payment from the National Pension System Trust to an employee on closure of account or 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 closure or his opting out of the scheme, shall be exempt from tax.

It is also proposed to amend clause (13) of the said section so as to provide that any payment in commutation of an annuity purchased out of contributions made on or after the 1st day of April, 2016, which exceeds forty per cent. of the annuity, shall be chargeable to tax. The said clause also seeks to provide that any payment from an approved superannuation fund by way of transfer to the account of the employee under a pension scheme referred to in section 80CCD notified by the Central Government shall be exempt from tax.

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to assessment year 2017-2018 and subsequent years.

Clause 9 To Finance Bill 2016

Clause 9 of the Bill seeks to amend section 17 of the Income-tax Act relating to “Salary”, “perquisite” and “profits in lieu of salary” defined.

Sub-section (2) of the aforesaid section defines “perquisite” to include, inter alia, the amount of any contribution to an approved superannuation fund by the employer in respect of the assesse, to the extent it exceeds one lakh rupees.

It is proposed to amend the said sub-section so as to increase the limit of employer’s contribution from one lakh rupees to one lakh and fifty thousand rupees.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to assessment year 2017-2018 and subsequent years.

Clause 36 To Finance Bill 2016

Clause 36 of the Bill seeks to amend section 80CCD of the Income-tax Act relating to deduction in respect of contribution to pension scheme of Central Government.

Sub-section (3) of the aforesaid section provides that the whole of the amount standing to the credit of the assesse including the accrual on the amount received by the assesse or nominee is taxed in the year of such receipt on account of closure or his opting out of the pension scheme.

It is proposed to amend the sub-section so as to provide that any amount received by the nominee, on the death of the assessee, under the pension scheme referred to in clause (a) of the said sub-section, is exempt from tax.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to assessment year 2017-2018 and subsequent years.

Clause 112 To Finance Bill 2016

Clause 112 of the Bill seeks to amend Part A of Fourth Schedule to the Income-tax Act relating to recognised provident fund.

Rule 6 of the aforesaid Schedule, inter alia, provides that contributions made by employer to the credit of an employee participating in a recognised provident fund, which are in excess of twelve per cent. of the salary of the employee, are liable to tax in the hands of the employee.

It is proposed to amend the said rule so as to provide an upper ceiling of one lakh and fifty thousand rupees to such contribution by the employer.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to assessment year 2017-2018 and subsequent years.

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