Contribution By Employer Exceeding Rs.7.5 Lakhs Is Now Taxable

In new Decade, Finance Minister present its 1 budget with hope to tackle sluggish Private Investment, Private consumption and Job Opportunity to revive the economy of country to its track.

There are various change`s specified in Direct Taxation from Slab Rate to DDT (Dividend distribution taxes). In this Article, we will discuss about change in Section 17 of Income Tax act related to provident and superannuation fund received by  salaried employees.

Provision before Budget 20-21

List Of Employer Contribution

Salary/Perquisite  received by individual is taxable u/s 15 of income tax act, As per Sec 17 (which specified definition of Salary/Perquisite)  sub section(2) Clause (vii)  provided that 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 and fifty thousand rupees will be part of salary of individual and taxable in hand of Individual`s.

Any contribution made by employees in Recognized Provident Fund is available as deduction u/s 80C and interest on Provident fund upto 9.5%. Interest is exempt.

However with respect to contribution made by Employer in Recognized Provident Fund for employee benefit is exempt in  hands of Individual provided it should not exceed 12% of Salary. Exceeding 12% will be part of salary and taxable in hand of individual.

Repayment of sum on retirement, resignation or termination:-

Nothing is taxable subject to following conditions:

1. Employee left the job after five years of service OR

2. Where Period of service less than 5 years, the termination is due to ill health, discontinuance of business of employer. OR

3. here on re-employment, the balance in R.P.F is transferred to R.P.F with new employer. [For the purpose of computing 5 years period, Period of services rendered with previous employer shall also be included.]

4. 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.

If none of the above conditions are satisfied then:

1. The amount not taxed earlier shall be taxed in the same manner as URPF, given below.

2. Any tax concession (e.g. 80C) availed by assesses for contribution to RPF shall now be withdrawn.

Sec 80 CCD:-

Sub Section (1) 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, twenty per cent of his gross total income in the previous year.

Sub Section (2) provides  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 ⁷⁵[does not exceed ten per cent of his salary in the previous year].

Provision after Budget 20-21

In section 17 of the Income-tax Act, in clause (2), for sub-clause (vii), the following sub-clauses shall be substituted with effect from the 1st day of April, 2021, namely:––

(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer––

(a) in a recognised provident fund;

(b) in the scheme referred to in sub-section (1) of section 80CCD; and

(c) in an approved superannuation fund, to the extent it exceeds seven lakh and fifty thousand rupees in a previous year;

(viia) the annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme referred to in sub-clause (vii) to the extent it relates to the contribution referred to in the said sub-clause which is included in total income under the said sub-clause in any previous year computed in such manner as may be prescribed.

Decoding of New Clause:-

With substitution of earlier clause of Superannuation fund which is exempt upto Rs 1,50,000 contributed by employers with this new clause which will take into consideration Recognized Provident Fund, Superannuation Fund and Fund contributed  in National Pension Scheme as specified u/s 80CCD,by Employer ,with Limit Rs 7,50,000.That means,  Employer Contribution in all  3 specified fund including interest earned on same amount ,during Previous Financial Year,  will be taxable in hands of employees  if it is exceeding Rs 7,50,000.

However the deduction available for employees for Employer Contribution will remain same as specified below:-

1. 12% of Employer contribution but with Cap of Rs 7,50,000 as specified (along with other 2).

2. Interest earned upto 9.5 %  on provident fund contributed by employer with Cap of Rs 7,50,000 as specified (along with other 2).

3. Deduction u/s 80 CCD,contribution made by Employer in NPS is allowed as deduction (10% of his salary) but with Cap of Rs. 7,50,000 (along with other 2).

 Author can be reached at manishkalwani1996@gmail.com