Perquisite valuation of annual accretion to balance of PF & Pension

Method for computation of Perquisite Value as referred in section 17(2)(viia) of Income Tax Act, 1961 (the Act) in respect of annual accretion to the balance of recognised provident Fund (RPF), Approved Superannuation Fund and National Pension scheme (NPS).

Finance Act 2020 had amended the provisions of section 17(2) of the Act and substituted sub-clauses (vii) and (viia) for the existing sub-clause (vii) of clause (2) of section 17, w.e.f. 1st April 2021 i.e., Assessment Year 2021-22.

The newly inserted Sub-Clause (vii) provided that perquisite value shall include the amount or aggregate amounts of any contribution made by the employer to the account of an employee:

(a) in a recognised provident fund

(b) in the scheme referred to in section 80CCD (1) i.e. National Pension Scheme (NPS) and

 (c) in an approved superannuation fund to the extent it exceeds Rs. 7.50 lakhs in a previous year.

Further, the newly inserted sub-clause (viia) in section 17(2) provided that annual accretion by way of interest, dividend or any other amount of similar nature earned during the previous year on the above mentioned funds or schemes (to the extent it relates to the employers’ contribution in excess of Rs. 7.50 lakhs in the employees account as stated in clause (vii) above), shall be included in the perquisite of the employee and for which the manner of computation had to be prescribed.

The Central Board of Direct Taxes (CBDT) has, vide its Notification No. 11/2021 dated 5th March 2021, prescribed the manner of computation of such annual accretion in the specified funds/ scheme by inserting new Rule 3B in the Income Tax Rules, 1961.

The said Rule provides that the annual accretion by way of interest, dividend or any other amount of similar nature during the previous year (hereinafter referred to as the current previous year) to the balance at the credit of the fund or scheme referred to in sub-clause (vii) of clause (2) of section 17 of the Act shall be the amount or aggregate of amounts computed in accordance with the following formula:

 TP = (PC/2) * R + (PC1 + TP1) * R

• TP = Taxable perquisite u/s 17(2) (viia) of the Act for the current previous year
• PC= Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs.7.5 lakhs to the specified fund or scheme (as referred to in section 17(2)(vii) of the Act) during the previous year
• TP1= Aggregate of taxable perquisite u/s 17(2) (viia) of the Act for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year*
• PC1= Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs.7.5 lakhs to the specified fund or scheme for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year*

[*For the purpose of TP1 and PC1, it may be noted that where the amount or aggregate of amounts of TP1 and PC1 exceeds the amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the first day of the current previous year, then the amount in excess of the amount or aggregate of amounts of the said balance shall be ignored for the purpose of computing the amount or aggregate of amounts of TP1 and PC1]

• R= I/ Favg
• I=Amount or aggregate of amounts of income accrued during the current previous year in the specified fund or scheme account
• Favg = (Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the first day of the current previous Year + Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the last day of the current previous year)/2.

The above can be understood by way of the following illustration for the purpose of computing the perquisite value in respect of annual accretion for FY 2020-21 and FY 2021-22.

 Illustration1:

• Balance in Provident Fund as on 01.04.2020 – Rs. 15 lakhs.
• Employer’s contribution to PF during FY 2020-21 – Rs. 9 lakhs
• Interest income accrued during FY 2020-21 – Rs. 2.5 lakhs
• Balance in Provident Fund as on 31.03.2021 – Rs. 40 lakhs
• Employer’s contribution to PF during FY 2021-22 – Rs. 10 lakhs
• Interest income accrued during FY 2021-22 – Rs. 5 lakhs
• Balance in Provident Fund as on 31.03.2022 – Rs. 70 lakhs

The figures considered in the illustration are hypothetical and have been assumed for the purpose of understanding only.

Based on the above example, the relevant strings of the formula and computation of Taxable Perquisite Value as per sub-clause (viia) of section 17(2) of the Act are as under: