Rule 16 of the Draft Income-tax Rules, 2026 prescribes the method for computing taxable “annual accretion” under section 17(1)(i) of the Act on income such as interest or dividends earned on employer contributions exceeding ₹7.5 lakh to specified funds or schemes referred to in section 17(1)(h). The taxable perquisite (TP) for the current tax year is calculated using the formula: TP = (PC/2) × R + (PC1 + TP1) × R. Here, PC represents the current year’s excess employer contribution above ₹7.5 lakh, while PC1 and TP1 denote excess contributions and taxable accretions from earlier years beginning on or after 1 April 2020. The rate factor (R) is determined by dividing total income accrued in the fund during the current year (I) by the average balance in the fund (F(avg.)), computed as the mean of opening and closing balances for the year. The rule further clarifies that if the combined amount of prior excess contributions and prior taxable accretions (PC1 + TP1) exceeds the opening balance of the fund for the current year, such excess shall be ignored for computation purposes. Overall, the provision establishes a clear, formula-based mechanism to ensure systematic taxation of income arising from excess employer contributions to specified funds.
Extract of Rule No. 16 of Draft Income-tax Rules, 2026
Rule 16
Annual accretion referred to in section 17(1)(i) of the Act.
(1) For the purposes of section 17(1)(i) of the Act, annual accretion by way of interest, dividend or any other amount of similar nature during the tax year (hereinafter in this rule referred to as the current tax year) to balance to the credit of the fund or scheme referred to in section 17(1)(h) shall be the amount or aggregate of amounts computed in accordance with the following formula, namely: —
TP = (PC/2) × R + (PC1 + TP1) × R
Where,
TP = Taxable perquisite under section 17(1)(i) of the Act for the current tax year; TP1 = Aggregate of taxable perquisite under section 17(1)(i) of the Act for the tax year or years commencing on or after 1st day of April, 2020 other than the current tax year; PC = Aggregate amount of principal contribution made by the employer in excess of Rs. 7.5 lakhs to the specified fund or scheme during the tax year;
PC1 = Aggregate amount of principal contribution made by the employer in excess of Rs. 7.5 lakhs to the specified fund or scheme for the tax year or years commencing on or after 1st day of April, 2020 other than the current tax year;
R = I/ F(avg.);
I = Aggregate amount of income accrued during the current tax year in the specified fund or scheme account;
F(avg.) = (Aggregate amount of balance to the credit of the specified fund or scheme on the first day of the current tax year + Aggregate amount of balance to the credit of the specified fund or scheme on the last day of the current tax year) divided by two.
(2) For the purposes of this rule,-
(a) “specified fund or scheme” shall mean a fund or scheme referred to in section 17(1)(h) of the Act;
(b) where the aggregate amount of TP1 and PC1 exceed the aggregate amount of balance to the credit of the specified fund or scheme on the first day of the current tax year, then the excess amount shall be ignored for the purpose of computing the aggregate amount of TP1 and PC1.
