Employer’s contribution and Employees’ contribution in India are governed by EPF Act, 1952. The employees’ contributions are obtained by employer @12% and along with equal contribution are deposited with the PF trust or PF commissioner at the designated bank account by the latter.
The Indian Income tax Act, 1961, has created a fiction by adding section 43B and sections 36 (1) (va), whereby it has intended to disallow employer’s contribution as expenditure or add to income employees’ contribution u/s 2(24)(x) in the hands of the employer as businessman.
In this paper, the authors have endeavored to bring out clearly the clauses of both the Acts and relevant notifications in this regard.
The views expressed in this paper are based on current legal provisions and enactments. The readers are advised to take proper professional care before relying on the information contained in this paper.
The Employees’ Provident Fund was created by an Act of Parliament in 1952 for providing the retirement benefits to the workers engaged in non-government sector. The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Schemes framed thereunder have been instituted as self-applying and the employers of the establishments are responsible to report compliance suo-moto. The three schemes framed are given below:
1. Employees’ Provident Funds Scheme, 1952
2. Employees’ Deposit-Linked Insurance Scheme, 1976 (EDLI) and
3. Employees’ Pension Scheme, 1995 (EPS) (Earlier the Employees’ Family Pension Scheme, 1971)
The Employees Provident Funds Scheme, 1952 was introduced in November 1952 to provide post retirement financial support to the workers employed in Industrial & Commercial Sector establishments. The scheme provided for provident fund system on contributory basis by the Employers and the Employees at equal rate. It made available to the employee concerned the accretions in the Provident Fund a/c with interest in lump sum on retirement or leaving the job.
This scheme applies to:
As per Para 26(2) of the Employees’ Provident Fund Scheme, 1952,
The term employee includes the following persons also:
Employee” as defined in Section 2(f) of the Act means any person
Thus the term “employee” includes:
(1) Employed by or through the contractor in or in connection with the work of the establishment
(2) Engaged as an apprentice, not being an apprentice under the Apprentices Act, 1961
Who is an Excluded Employee?
An employee of the Company to whom both the following two conditions apply at the time of joining the services of the Company
a) His/Her Pay is more than Rs. 15000/- per month
b) Does not have any current PF/EPS Balance under EPF & MP Act, 1952
as defined under pare 2(f) of the Employees’ Provident Fund Scheme means an employee who having been a member of the fund has withdraw the full amount of accumulation in the fund on retirement from service after attaining the age of 55 years;
Meaning of Pay:
‘Pay’ includes basic wages with dearness allowance, retaining allowance, (if any) and cash value of food concessions admissible thereon and leave encashment.
CLARIFICATION ON LEAVE ENCASHMENT EFFECTIVE
DATE OF IMPLEMENTATION
Based on the representations received from Employers’ Association expressing difficulties in implementing the date for enforcement of PF Contribution on leave encashment paid on or after 01.10.1994 till 30.04.1995, the matter has been referred to the Central Board of Trustees for deciding the date of enforcement of PF Contribution on leave encashment. Till such time a decision is taken, the effective Date from which the recovery of PF contribution on leave encashment shall be from 01 May 2005 onwards.
However it was further held by the Madurai Bench of the Madras High Court that Provident fund contributions need not be deducted from the payment made towards annual leave encashment,
For Detail Analysis Read: Ruling on PF deductions from leave encashment
(Auth: Govt of India, Min. of Labour, Employees Provident Fund Organisation, New Delhi letter No.Coord./3(4)2002/clarifications/50673 dated 09 September 2005)
The establishment is allowed the coverage under the provisions of the Act on voluntary basis with the consent of majority of the employees.
A4: As per amendment-dated 22.9.1997 in the Act, both the employees and employer contribute to the fund at the rate of 12% of the basic wages, dearness allowance and retaining allowance, if any, payable to employees per month. The rate of contribution is 10% in the case of following establishments:
12% of the Pay
* “Pay” includes basic wages# with dearness allowance, retaining allowance** (if any), and cash value of food concession and leave encashment.
# Basic Wages means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-
** Retaining allowance means allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his service
NOTE: The employer cannot reduce the PAY.
A5: AS far as the employee is concerned the PF contributions are calculated as follows:
STATUS of EMPLOYEES’ CONTRIBUTION:
|Towards PF||12% of the pay||100% of the pay|
STATUS of EMPLOYER’S CONTRIBUTION:
|Towards PF||12% of the pay||12% of the pay|
Further the employer’s contribution should be divided as follows:
Pension Fund (EPS)– 8.33% of Pensionable Salary
Pensionable Salary: Pay or Rs. 15000/- whichever is less
Provident Fund – 12% of the Pay minus EPS
A6: The PF dues are required to be deposited as follows:
(1) 12% of the Pay, Employees Provident Fund Contribution – A/c No. – 1
(2) Voluntary Provident Fund Contribution – A/c No. – 1
(3) 12% of the Pay minus EPS, Employer Provident Fund, – A/c No. – 1
(4) 8.33% of the Pensionable Salary (EPS)-A/c No. – 10
(5) 0.50% [wef 01.06.2018 thorough Notification No. S.O. 2011(E)] of the Pay, PF Admn. Charges-Minimum Rs. 5/-pm, A/c No. – 2
(6) 0.50% of Pensionable Salary for EDLI contribution-A/c No. – 21
(7) 0.01% (Nil wef 01.04.2017) of Pensionable Salary for EDLI administrative charges – Minimum Rs. 2/-pm., A/c No.–22
Cheque in Fvg. of – State Bank of India – EPF A/c
A7: The EPF interest rates for various periods are noted below:
(2) 11% from 1-7-2000 to 31-03-2001
(3) 9.5% from 01-04-2001 to 31-03-2005
(4) 8.50 % from 01-04-2005 onwards
(5) 9.5% FY 10-11
(6) 8.25% FY 11-12
(7) 8.50% FY 12-13
(8) 8.75% FY 13-14 & 14-15
(9) 8.8% FY 15-16
(10) 8.65% FY 16-17
(11) 8.55% FY 17-18
# Interest is calculated on the monthly running balance of the member
# Interest on provident fund accumulations exempt from income tax
The clause 38(1) of the EPF scheme reads as follows:
“The employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee’s contribution from his wages which together with his own contribution as well as an administrative charge of such percentage [of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employee and in respect of which provident fund contributions are payable, as the Central Government may fix],
9: Grace period allowed for deposit of EPF dues by the employer and the relevant circular in this behalf and The ICAI views on the same
A9: Five days of grace period has been allowed to employers for payment of Provident Fund contributions. This grace period is additionally provided by the following circulars of the CPFC:
Also The ICAI has in its publication “ISSUES on TAX Audit 2003 revised” given in clause 16(b) the following views on EPF contribution collected by the employer from his employees:
However. In the present era„ employers compute the wages and EPF liabilities electronically (in most of the cases on real time basis) and file Electronic Challan-cum-Return (ECR), The remittances are also being deposited through Internet Banking. This has reduced the process and time taken in calculation of PF dues and its remittances in the bank. Accordingly, it has been decided that concession of grace period of 5 days available to the employers for depositing the contribution & other dues is withdrawn herewith. This decision shall apply from February, 2016 (contributions for month of January, 2016 and payable in the month of February, 2016).
16. (on tax audit report)
(b) Any sum received from employees towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x); and due date for payment and the actual date of payment to the concerned authorities under section 36(1)(va).
Clause (b) (pg 79)
(iii) Kindly clarify whether it is mandatory to mention the cases where employers have not deducted/collected P.F. etc. from the employees.
Ans. There is no specific requirement in sub-clause (b) to mention the cases where employers have not deducted/collected provident fund etc. from their employees. The objective of the above sub clause is to see whether the sum so recovered from employees has been treated as income under section 2 (24)(x).
(iv) Where the provident fund contributions are not remitted within the due date but remitted within the financial year after due date. Please clarify (a) whether it is to be reported for employee’s contribution?
(b) Whether it is an allowable expenditure?
Ans. Paragraph 27.4 clearly says that section 36(i)(va) of the Act permits deduction of such sum if it is credited by the assessee to the account of the employees in the relevant statutory fund on or before the due date, i.e., the date by which it is required to be credited as per the provisions of the applicable law etc. It may be noted that Employees’ P.F Act provides for 5 days of grace period for payment of contribution. This can be taken into consideration for determining the due date of payment.
(v) In the month of April 1999, the State of Delhi declared an increase in wages w.e.f. 1st February, 1999. In such case what will be the due date for payment of PF, ESI as per section 36(1)(va)?
Ans. Since the wage increase has been declared by the State Government only in the month of April, 1999 the appropriate recoveries of employees’ contributions towards the increased provident fund would obviously be made in the previous year 1999-2000. The provisions of section 36(1)(va) will apply accordingly.
(vi) The assessee applied for a P.F. No. in time but the same was not allotted within a reasonable time due to departmental delay. The assessee duly made a provision for the contribution by the employer in its profit and loss account and balance sheet. But the same could not be remitted to the authorities because of the non allotment of P.F. No. Please clarify the duty of the tax auditor in this regard.
Ans. The objective of sub-clause (b) is to get information in respect of sums recovered from employees towards provident fund contributions etc. and the dates on which such contributions were remitted to the statutory authorities. This information is necessary to determine the allowability of the payment of such contributions under the provisions of section 36(1)(va). In the given issue the assessee has not remitted the contribution to the statutory authorities, whatever be the reasons therefor. The tax auditor has to indicate the factual position in this regard.
(vii) Please clarify whether the grace period of 5 days should be considered while determining due date for payment of PF, ESIC contributions for reporting under section 36(1)(va) read with sections 2(24)(x) and 43-B.
Ans. The following extracts from the judgment of the Income-tax Appellate Tribunal in Hunsur Plywood Works Ltd. v. Deputy Commission of Income-tax (1995) 54 ITD 394 will make the position clear.
“Paragraph 38 of the Employees’ Provident Funds Scheme, 1952 says that the amounts under consideration in respect of wages of the employees for any particular month shall be paid within 15 days of the close of every month.
Clause (iii) of CPFC’s Circular No.E. 128(1) 60-III dated 19-3-1964 as modified by Circular No.E. 11/128 (section 14-B Amendment)/73 dated 24-10-1973 allows five days of grace period to the employers for payment of provident fund contribution, administrative charges and inspection charges. The said Circular also states that if payment be made within the said period of grace, no damages as per section 14-B of the Employees’s Provident Funds and Miscellaneous provisions Act, 1952 shall be levied.
Furthermore, our attention has also been drawn to CPFC’s Circular No. E.128 (1)60-IV dated 29-4-1967 in clause (iii) of which it has been stated that the Central Board of Trustees at its meeting on 13-4-1967 agreed that if payment was made within grace period already allowed by it, then such payments should not be counted as default even for the purpose of counting the number of defaults………… (Page 399)
Thus, we find that from strict judicial angle, the period or days of grace would seem to be falling within a twilight region. The period certainly follows the exact due date but at the same time no action by the other side is possible within the said period except for registering a protest. Since the present issue is required to be resolved from practical angle, as discussed by us above, we are required to examine the consequences of making of payment of the employees’ contribution to the EPF etc., within five days’ period of grace. We find that if an employer makes payment within such period of grace, not only is he not liable to pay any damages in accordance with the Employees’ Provident Fund Scheme and the relevant Act, but by virtue of the Circular dated 29-4-1967 as mentioned above; he will also not be treated to be in default. Hence, we ultimately hold that from practical point of view, the five days’ period of grace after 15th of the succeeding months is to be considered merely as an extension of the early 15 days and all the consequences of making payment within the said 15 days should be considered to follow if the payment be made within the grace period following the said period of 15 days.”…….. (Page 400).
Also refer to CIT v. Salem Cooperative Spinning Mills Ltd. 
258 ITR 360 (Mad).
(viii) A non-corporate assessee is maintaining books of account on cash basis. It has not deposited its P.F. contributions before the end of the relevant previous year but remitted the same within the statutory due dates. Will it be allowed deduction of the same on payment basis?
Ans. If an assessee is maintaining books of account on cash basis, any remittance of P.F. contributions recovered from its employees, to the statutory authorities after the end of the relevant previous year, even if it is before the statutory due date should not be allowed as a deduction under section 36(1)(va) because as per the provisions of section 145 the income of the assessee is to be computed in accordance with the cash method of accounting.
(ix) Please clarify how a tax auditor can verify the details of payments of P.F. contributions etc. in the case of tax audit of the accounts of a sub-contractor particularly where the liability on this account is on the main employer?
Ans. Many a time in the construction industry the main contractor subcontracts portions of the main contract to various sub-contractors. Such sub-contracting may of two types. Firstly, the sub-contractor may be asked to execute the sub-contract merely as an agent while the main contractor will assume responsibility for recoveries of P.F., ESI contributions and remittance of the same to the statutory authorities. In this case the tax auditor of the subcontractor need not report under this clause because the subcontractor is not responsible either for collection or remittance of the P.F. contributions etc. There may also be cases of subcontractors who may independently execute such sub-contracts by employing labourers etc? In such a situation the employer – employee relationship exists between the sub-contractor and the workers and the responsibility for recovering P.F. contribution etc. and remitting the same to the statutory authorities wholly rests with the sub-contractor. In this case the tax auditor has to comply with the requirements of this clause.
The income tax treatment of PF contribution can be summarized as follows:
|Particulars of Contribution||Paid within due date as per EPF ACT||Paid after due date as per EPF ACT but before return filing date under IT ACT, 1961u/s 139(1)||Tax treatment||Any deduction in any other year|
|Employee’s contribution||Yes, in view of section 36(1)(va) if payment is made by cheque it should be realized within 15 days of the due date (including 5 grace days)||NA||No taxability arises first treat it as income under section 2(24)(X)And then allow deduction u/s 36(1)(va)||no|
|Employee’s contribution||No||NA||Treated as income of the employer under section 2(24)(x)||no|
|Employer’s contribution||Yes||NA||Fully deductible u/s 43B(b)||no|
|Employer’s contribution||No||Yes||Fully deductible u/s 43B(b) w.e.f. A.Y 2004-05||no|
|Employer’s contribution||No||No||Not deductible u/s 43B(b) w.e.f. A.Y 2004-05||It will be allowed as deductible in the year in which the employer has finally paid it. $|
$ It is assumed that the employer is following mercantile system of accounting.
Suppose A ltd has paid salary (pay as per EPF ACT) for the month of March 2018 as RS. 1,20,00,000.00 in April 2018. The return filing date of the company under IT Act is 30th September 2018. Then the due dates and amounts of contribution are as follows:
|Employer’s contribution @12%||Employees’ contribution @12%||Due date as per EPF Act, 1952||Due date as per IT Act, 1961|
|14,40,000.00||14,40,000.00||15th April 2018||Sep 30th 2018|
Now different combination for employees’ and employer’s contribution is:
|Particulars of contribution||Amount payable||Date of payment||Tax treatment in the hands of the employer||remarks|
|Employees’||14,40,000.00||Before 15th April 2018||First add amount payable to income u/s 2(24)(x) and then allow deduction u/s 36(1)(va) in the F.Y. 2017-18||If paid by cheque, the cheque should be cleared within 15th days of the following month|
|Employees’||14,40,000.00||after 15th April 2018||add amount payable to income u/s 2(24)(x) in the F.Y. 2017-18||No remarks|
|Employer’s||14,40,000.00||Before 15th April 2018||Amount payable is Fully allowable in the F.Y. 2017-18||If paid by cheque, the cheque should be cleared within 15th days of the due date i.e. 5th June 2009|
|Employer’s||14,40,000.00||after 15th April 2018 but before 30th sep 2018 (ITR due date.)||Amount payable Fully allowable in the F.Y. 2017-18||If paid by cheque, the cheque should be cleared within 15th days of the due date i.e. 5th June 2009|
|Employer’s||14,40,000.00||after 30th sep 2018(ITR due date.)||Amount payable is disallowed in the F.Y. 2017-18||Allowed in the year in which finally paid|
As per circular No. 153 [F. No. 215/22/71-IT(A-II)], dated 30-11-1974 CBDT has clarified that:
In order to avail of the benefits of the Income-tax Act,
Full circular is annexed below:
SECTION 2(38) l RECOGNIZED PROVIDENT FUND
21. Provident fund exempt under section 17(1) of the Employees’ Provident Fund Act, 1952 – Whether recognition by the Commissioner necessary before it can enjoy benefits of recognised provident fund
22. Reference is invited to Board’s Circular F. No. 44/14/64-ITJ, dated 22-3-1965 [Annex] on the above subject.
23. I am directed to say that the Board has re-examined the contents of its circular referred to above. According to section 2(38), the term “recognised provident fund” means a provident fund which has been and continues to be recognised by the 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 Fund Act, 1952. It would thus appear that in order to avail of the benefits of the Income-tax Act, a provident fund has either to be recognised in accordance with the provisions of the Income-tax Act or it must be established under a Scheme framed under the Employees’ Provident Fund Act, 1952. The funds which are not established under the Employees’ Provident Fund Scheme, 1952, have to be expressly recognised by the Commissioner under rule 3 of Part A of the Fourth Schedule to the Income-tax Act before they can be covered by the definition in section 2(38).
24. When a fund is exempted under section 17 of the Employees’ Provident Fund and Family Pension Fund Act, 1952, it is implicit that it is not establishedunder the Employees’ Provident Fund Scheme, 1952. It has, therefore, to be recognised by the Commissioner under the relevant provisions of the Income-tax Act before it can enjoy benefits of a “recognized provident fund” under the Act.
In view thereof, Board’s Circular No. 44/14/64-ITJ, dated 22-3-1965 is withdrawn with immediate effect.
Circular : No. 153 [F. No. 215/22/71-IT(A-II)], dated 30-11-1974.
ANNEX – CIRCULAR, DATED 22-3-1965 REFERRED TO IN CLARIFICATION
According to section 2(38) recognised provident fund means a provident fund which has been and continues to be recognised by the 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 Fund Act, 1952. A question was raised as to whether private provident funds (as distinguished from provident funds maintained by the Central Board of Trustees constituted under the provisions of the Employees’ Provident Fund Scheme) which were or are exempt under the provisions of section 17(1) of the Employees’ Provident Fund Act, 1952, and/or under Para 79 of the Employees’ Provident Fund Scheme, 1952, will be covered by the definition of recognised provident fund under section 2(38). Such funds are not established under either the Employees’ Provident Fund Act or under the Employees’ Provident Fund Scheme. As such, they do not fall within the terms of the definition under section 2(38) and cannot automatically get recognition under the Income-tax Act. In order to get the benefits of recognition, they will have to apply for recognition under Part A of the Fourth Schedule.
The following tax treatment is done in the hands of employees/contributors:
|Sl. No.||Particulars||Statutory PF||Recognized PF||Unrecognized PF||Public PF|
|1.||Employers Contribution to PF||Exempt from tax||Exempt Upto 12% of salary excess taxable in the hands of the employee||Exempt from Tax||No contribution from employer|
|2.||Deduction u/s 80C on employees contribution||Available up-to Rs. 1,50,000||Available up-to Rs. 1,50,000||Not available||Available up-to Rs. 1,50,000|
|3.||Interest on contribution by employer and employee||Exempt from tax||Exemption Upto notified amount of interest rate. 9.5%||Exempt from tax||Exempt from tax|
|4.||Lumpsum payment given on retirement to the employee||Exempt from tax||Exempt from tax (service period should not be less than 5 years else fully taxable)||a) Own Contribution- Exempt
b) Interest on own contribution – taxable as income from other sources
c) Employer’s contribution and interest thereon- taxable so included in gross salary
|Exempt from tax|
A14: The provident funds can be classified into four following categories:
|Un-exempt or statutory provident fund under EPF&MP ACT, 1952||Exempted provident fund||Unrecognized Provident fund||Excluded provident fund
An Excluded Employees’ Trust is one, which does not come under the purview of the PF Department, but its policies are framed based on the PF Act. The regulatory Authorities are the Income Tax department
|Exempted or Recognized provident fund u/s 17(1) of the EPF&MP ACT, 1952 and recognized by CIT under section 2(38) of the income tax Act, 1961 read along with rules given under PART A of Schedule IV||Unrecognized provident fund which is not recognized by the CIT||recognized by CIT under section 2(38) of the income tax Act, 1961 read along with rules given under PART A of Schedule IV||Unrecognized provident fund which is not recognized by the CIT|
|Once the Company crosses the 20 employees’ mark,
• it is covered under the Act and has to apply to the RPFC for the Allotment of a Code Number and
• should remit the PF contributions from the date of coverage
|• After being covered under the provisions of the PF Act and
• if it is a profit making Company
• With 200 employees,
• It may pass a Board Resolution and
• Apply to the IT Department for recognition of a Trust and thereafter file for exemption with the RPFC.
• On receipt of the approval from RPFC the Trust can comply as “Exempt
|No tax concessions to employees under section 80C and other sections of the Income tax Act, 1961||An “Excluded Employee” shall mean an employee of the Company to whom both of the following two conditions apply at the time of the coverage of the Company under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 or at the time of his joining the services of the Company, whichever is later.
i. His pay at the relevant time as above is more than Rs 6500/- per month.
ii. Does not have any current PF Balance
|No tax concessions to employees under section 80C and other sections of the Income tax Act, 1961|
Employee contribution of 12% of Basic, D.A, Leave Encashment and cash value
♠ Employer contribution of 12% of Basic, D.A, Leave Encashment and cash value of food concession if any, out of which
→ 8.33% with a cap of Rs.15000/- to be paid towards EPS a/c.
→ EDLI @ 0.00% (on capped wages at Rs.15000/-)
→EDLI Administration charges @ 0.50 % of Basic and D.A.
→PF Administration charges @ 0.5 % of Basic and D.A.
|Contribution: Out of 12% of Employer’s contribution, 8.33% (on wages 15000/-)
transferred to EPS A/c
→ EDLI @ 0.00% (on wages capped at Rs.15000/-)
→EDLI Administration charges @ 0.50% of Basic and Dearness Allowance
(on wages capped at 15000/-)
→ PF Inspection charges @ 0.18% of Basic and D.A.
1. M. K. Shah Advocate 2. CA Bhupesh Kumar Shah
11/3, Butler Road, Dalibagh, Lucknow- 226001 – Email- [email protected]
Author 1 is a practicing income tax lawyer at Lucknow-UP & Author 2 is a member of the institute of Chartered Accountants of India
(Republished With Amendments)