Note on Perquisite Valuation under Clause (vii) & (viia) of Section 17of Income Tax Act, 1961

Finance Act, 2020 had made amendment in Sec 17 of the Income Tax Act which deals with valuation of perquisite. It had introduced two new sub- classes, Sub Clause (vii) & (viia) Under Clause 2 of the section 17.

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

(a) In a recognized provident fund;

(b) In national pension scheme of Central Govt.; and

(c) In an approved superannuation fund ,

To the extent it exceeds Rs. 7,50,000/- 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 the 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 a previous year.

Both the sub clauses are applicable from assessment year 2021-22.

CBDT, vide its Notification No. 11 of 2021 dated 5th March, 2021 came out with rule 3B Annual Accretion referred to in sub clause (viia) of Clause 2 of Section 17 of the Act which prescribed formula to calculate perquisite value on accretion to the funds. The said Rule is applicable from Assessment Year 2021-22.

The formula is as below

TP=(PC/2)*R+(PC1+TP1)*R

Where,

TP = taxable perquisite value under sub-clause (viia) of Clause 2 of Sec. 17 of the current previous year ;

TP1= aggregate of taxable perquisite value under sub-clause (viia) of Clause 2 of Sec 17 of the Act for previous year or years commencing on or after 1st day of April, 2020 other than the current previous year .

PC = amount or aggregate of amounts of principal contribution made by the employer in excess of       Rs. 7.5 lakh to the specified fund or scheme during the year ;

PC1 = amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme for previous year or years commencing on or after 1st day of April, 2020 other than the current previous year .

R = I/Favg;

I= Amount or aggregate of amounts of income accrued during the current previous year in the specified fund or other scheme account;

Favg: (Amount or aggregate of amounts of the balance to the credit of the specified fund or scheme of 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

Note : where the amount or aggregate of amounts of TP1 and PC1 exceeds the amount or aggregate of amounts balance to the credit of the specified fund or scheme of 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 CP1.

In simple words, the perquisite arising from the annual accretion on the employer’s contribution to welfare  funds shall be the average return (I/Favg) on the sum of  :

(a) ½ of the current year’s contribution in excess of Rs. 7.5 lakh;

(b) Contribution in excess of Rs. 7.5 lakh up to last year; and

(c) Accretion taxable as perquisite upto last year

If the sum of (b) and (c ) exceeds the opening balance of the fund, it shall be restricted to such opening balance.

Let us understand this with illustration.

Particulars Recognized PF National pension scheme Superannuation fund Total
FY 2020-21
Opening balance of employer contribution 6,00,000 7,00,000 8,00,000 21,00,000
Employer’s contribution 3,00,000 3,00,000 3,00,000 9,00,000
Income accrued therein 80,000 90,00 95,000 2,65,000
Closing balance 9,80,000 10,90,000 11,95,000 32,65,000

FY 2021-22
Opening balance 9,80,000 10,90,000 11,95,000 32,65,000
Employer’s contribution 3,20,000 3,15,000 3,50,0000 9,85,000
Interest accrued therein 90,000 1,05,000 1,10,000 3,05,000
Closing balance 13,90,000 15,10,000 16,55,000 45,55,000

Therefore, in the AY 2021-22, following income will be considered as a perquisite.

Under Clause (vii), this would be –
Total employer’s contribution Rs. 9,00,000/-
Less : Standard limit Rs. 7,50,000/-
Perquisite value Rs. 1,50,000/-

Under Clause (viia), this would be  –

TP=(PC/2)*R+(PC1+TP1)*R

PC = 9,00,000-7,50,000 = 1,50,000.

R = I/Favg

I= Rs. 2,65,000

Favg = (21,00,000+32,65,000)/2 = 26,82,500

Therefore, R = 2,65,000/26,82,500 = 9.88%.

PC1 & TP1 = Nil.

Therefore, TP = 1,50,000/2*9.88% = 7409/-.

Therefore, in the AY 2022-22, following income will be considered as a perquisite.

Under Clause (vii), this would be –
Total employer’s contribution Rs. 9,85,000/-
Less : Standard limit Rs. 7,50,000/-
Perquisite value Rs. 2,35,000/-

Under Clause (viia), this would be  –

TP=(PC/2)*R+(PC1+TP1)*R

PC = 9,85,000-7,50,000 = 2,35,000.

R = I/Favg

I= Rs. 3,05,000

Favg = (32,65,000+45,55,000)/2 = 39,10,000

Therefore, R = 3,05,000/39,10,000 = 7.80%.

PC1 & TP1 = Rs. 1,50,000 & Rs. 7409

Therefore, TP = (2,35,000/2*7.80%)+(1,50,000+7409)*7.80%

= Rs. 21,444/-.

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One Comment

  1. Amogh Gokhale says:

    Notification No 11/2021 dated 5th March, 2021, clearly stated that …They shall come into force from the 1st day of April, 2021
    And you have mentioned that …Both the sub clauses are applicable from assessment year 2021-22.
    So provisions will be applicable for E-TDS Return of F.Y.2020-21 (Salary-TDS) (A.Y.2021-22)? How it is possible? Can you explain?

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