“Unlock the intricacies of setting up trusts for employee benefits. Dive into the nature, objectives, and conditions for trust approval by the Income Tax department. Comprehensive insights for seamless compliance.”
This Article is aimed at providing knowledge the nature and objectives set up for the benefit of the employees and also enlighten about the conditions required to be fulfilled for getting approval from the Income tax department.
Let’s start with the Nature & Objectives of the Trust-
NATURE & OBJECTIVES OF TRUST
- Receiving contribution for the benefit of the employee running and maintaining as “Recognized Provident fund” or “Provident fund to which the Provident Fund Act, 1925 applies.
- Fund which contains the provisions of annuities for employees in the trade or undertaking on their Retirement and maintained as “Approved Superannuation Fund”
- Fund which contains the provisions of gratuity to employees in the trade or undertaking on their Retirement and maintained as “Approved Gratuity Fund”.
RECOGNISED PROVIDENT FUND
“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 of Income Tax 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. (As per Sec 2(38) of Income Tax act).
Rules contained in Part A of Fourth Schedule
These rules speak about the conditions required to be fulfilled by the Provident Fund Trust for getting recognition from Income tax authority.
- All employees shall be employed in India, or the employer must have principal place of business in India except recognition shall be granted to the Trust where employer having place of business outside India subject to the proportion of employees employed outside India does not exceed 10% of the Total employees.
- The contribution deducted from the salary of the employee shall contain definite proportion of his salary and shall be credited to the employees Individual’s account.
- Employer shall also contribute out of his own money to the individual account of the employees and which shall not exceed the amount of contribution of the employee.
- The fund shall be vested in two or more trustees or in the Official Trustee under a trust.
- The fund shall consist of
-
- Contributions received and accumulation thereof.
- Interest credited in respect of such contribution and accumulations.
- Securities purchased therewith and any capital gain arising from the transfer of capital assets of the Fund.
- The employer shall not be entitled to recover any sum from the Fund except in a case where the employee is dismissed for misconduct or voluntary leaves his employment without providing any reason.
Taxable Income of Employee- Following income shall be taxable in the hands of the employee and included in his Total Income (Rule 6)
- Employer’s Annual contribution in excess of 10% of the Salary, and
- Interest credited on the balance to the credit of the employee in so far as it exceeds 1/3rd of the salary of the employee or is allowed at a rate exceeding such rate as may be fixed by the Central Government.
Deduction under Sec 80C to employee- Own Contribution of the employee to his individual account shall be entitled for deduction u/s 80C.
Deduction under Sec 36(i)(iv) to employer- Contribution made by the employer towards recognized provident Fund to the individual account of the employee shall be allowed as expenditure.
Exclusion from the Total Income of the employee – The accumulated balance due and becoming payable to the employee shall not be included in the ‘Total Income’ where
- Employee has rendered continuous service for a period of 5 years, or
- Not rendered continuous service of 5 years but 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.
APPROVED SUPERANNUATION FUND
“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. (As per Sec 2(6) of the Income Tax Act)
Rules contained in Part B of Fourth Schedule
These rules speak about the application made for approval of superannuation fund and the conditions which requires to be fulfilled for getting approval.
Application for Approval- An application for approval shall proceed as follows:
- Application shall be made in writing by the trustees of the Fund.
- Application shall be accompanied by-
- Copy of the Instrument containing two copies of the rules and objectives.
- Two copies of the Accounts of the Fund for the last year for which such accounts have been made up.
- Such other information as the Commissioner may require.
*Note-
* If any alteration in the rules, constitution, objects or conditions of the fund is made at any time after the date of the application for approval, the trustees of the fund shall forthwith communicate such alteration to the Income-tax Officer mentioned in sub-rule above, and in default of such communication any approval given shall, unless the Commissioner otherwise orders, be deemed to have been withdrawn from the date on which the alteration took effect.
*The Commissioner shall neither refuse nor withdraw approval to any superannuation fund or any part of a superannuation fund unless he has given the trustees of that fund a reasonable opportunity of being heard in the matter.
*An employer objecting to an order of the Commissioner refusing to accord approval to a superannuation fund or an order withdrawing such approval may appeal, within 60 days of such order, to the Board.
* The appeal shall be in such form and shall be verified in such manner and shall be subject to the payment of such fee as may be prescribed.
Conditions for Approval- Fund should satisfy the following conditions :
- The fund shall be a fund established under an irrevocable trust in connection with a trade or undertaking carried on in India, and not less than 90% of the employees shall be employed in India;
- the fund shall have for its sole purpose the provision of annuities for employees in the trade or undertaking on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement, or for the widows, children or dependants of persons who are or have been such employees on the death of those persons ;
- the employer in the trade or undertaking shall be a contributor to the fund ;
- all annuities, pensions and other benefits granted from the fund shall be payable only in India.
*Note
* The trustees of an approved superannuation fund and any employer who contributes to an approved superannuation fund shall, when required by notice from the Income-tax Officer, within such period not being less than 21 days from the date of the notice, as may be specified in the notice, furnish such return, statement, particulars or information, as the Income-tax Officer may require.
Annuity deemed to be Salary in the hands of employee-
Where any annuity or pension is paid to an employee during his life-time, the pension/annuity shall be treated as salary paid to the employee for the purposes of this Act. (As per Sec 17(1)(ii) of the Income Tax act)
Deduction under Sec 36(i)(iv) to employer- Contribution made by the employer towards approved superannuation fund to the individual account of the employee shall be allowed as expenditure.
Contribution made by employer become taxable in the hands of employer-
Where any contributions by an employer, including the interest thereon, if any are repaid to the employer, the amount so repaid shall be to be the income of the employer of the previous year in which it is so repaid.
APPROVED GRATUITY FUND
“Approved gratuity fund” means a gratuity 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 C of the Fourth Schedule (As per Sec 2(5) of the Income Tax act).
Rules contained in Part C of Fourth Schedule
These rules speak about the application made for approval of gratuity fund and the conditions which requires to be fulfilled for getting approval.
Application for Approval- An application for approval shall proceed as follows:
- Application shall be made in writing by the trustees of the Fund.
- Application shall be accompanied by-
- Copy of the Instrument containing two copies of the rules and objectives.
- Two copies of the Accounts of the Fund for the last 3 years for which such accounts have been made up.
- Such other information as the Commissioner may require.
*Note-
* If any alteration in the rules, constitution, objects or conditions of the fund is made at any time after the date of the application for approval, the trustees of the fund shall forthwith communicate such alteration to the Income-tax Officer mentioned in sub-rule above, and in default of such communication any approval given shall, unless the Commissioner otherwise orders, be deemed to have been withdrawn from the date on which the alteration took effect.
*The Commissioner shall neither refuse nor withdraw approval to any superannuation fund or any part of a superannuation fund unless he has given the trustees of that fund a reasonable opportunity of being heard in the matter.
*An employer objecting to an order of the Commissioner refusing to accord approval to a superannuation fund or an order withdrawing such approval may appeal, within 60 days of such order, to the Board.
* The appeal shall be in such form and shall be verified in such manner and shall be subject to the payment of such fee as may be prescribed.
Conditions for Approval- Fund should satisfy the following conditions:
- The fund shall be a fund established under an irrevocable trust in connection with a trade or undertaking carried on in India, and not less than 90% of the employees shall be employed in India;
- the fund shall have for its sole purpose the provision of gratuity in the trade or undertaking on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement, or on termination of their employment after a minimum period of service specified in the rules of the fund or to the widows, children or dependants of such employees on their death ;
- the employer in the trade or undertaking shall be a contributor to the fund ;
- all benefits granted by the fund shall be payable only in India.
Deduction under Sec 36(i)(v) to employer- Contribution made by the employer towards an approved gratuity fund for the exclusive benefit of the employee under an irrevocable trust shall be allowed as expenditure.
Gratuity deemed to be Salary in the hands of employee-
Where any gratuity is paid to an employee during his life-time, the gratuity shall be treated as salary paid to the employee for the purposes of this Act. (As per Sec 17(1)(iii) of the Income Tax act)
Contribution made by employer become taxable in the hands of employer-
Where any contributions by an employer, including the interest thereon, if any are repaid to the employer, the amount so repaid shall be to be the income of the employer of the previous year in which it is so repaid.
Author Bio
Sir / Madam – I m contributing Rs.100 per month for the last 5-6 years to employee trust. But I have not seen any financial details published nor we know about the trustees details. Do we have the rights to ask the trust to share these details? Kindly guide. Thank you.