ON THE QUESTION OF APPROVAL: HOW TO GET IT APPROVED

An approved superannuation fund is a fund that is approved by the Commissioner of Income Tax. The rules pertaining to this can be found in Part B of the Fourth Schedule of the Income Tax Act, 1961. Superannuation funds are approved by the Income Tax Commissioner based on whether or not they are meeting certain conditions. One can confirm from his/her employer whether your superannuation fund is approved or not. Tax exemptions are available only to approved superannuation funds.

Here are the tax benefits for an approved superannuation fund:

From the employee’s point of view:

1) Employee contribution (possible in the case of defined contribution and not defined benefit) for an approved superannuation fund is eligible for deduction u/s 80C, subject to the limit set in Section 80CCE.

2) Benefits payable on death or injury are tax-exempted.

3) Pension or annuity will be treated as salary income and taxed accordingly.

4) At the time of change of job, any amount withdrawn is taxable under the head ‘income from other sources’.

5) Interest from a superannuation fund is tax-free.

6) On retirement, 1/3 of the commuted fund is fully exempt from tax and the remaining amount if transferred to an annuity is tax-free and if the amount is withdrawn, it is taxable in the hands of the employee.

From the employer’s point of view:

1) The contribution of employer to the fund is allowed as expenditure deduction for business u/s 36(1)(iv) subject to certain limits of the Income Tax Act 1962.

2) Income received by the trustees on behalf of an approved superannuation fund is exempt u/s 10(25)(III).

  • Till the time no approval has been granted or employer has not received any information from the CIT, it will be considered as unapproved. The approval has to be received in writing only from CIT to be considered as approved (Rule 2, PART B, FOURTH SCHEDULE, IT ACT 1961)
  • In such a case there can be a possibility to apply for the approval from a retrospective date and it is the discretion of the CIT to grant it. If all the requirements were followed at the time of applying for approval then CIT may grant the approval. Drawing the analogy from the case CIT vs Jaipur Thar Gramin Bank [2017]:

“Where an assessee had filed application to competent authority for approval of a Gratuity Scheme and had duly complied with conditions laid down for approval, Assessing Officer cannot disallow assessee’s claim for deduction under section 36(1)(v) merely because the application for approval was pending before the Commissioner. The Commissioner should have either rejected or approved the Gratuity Scheme”

“The assessee cannot suffer for the inaction of the Revenue authorities and the AO ought not to have disallowed the claim merely because the Commissioner has not granted approval of the Gratuity Scheme. Once the assessee fulfils the condition laid down for approval having created a trust with the Life Insurance Corporation of India, and it is not the case of Revenue that assessee has not deposited money in terms of creation of the trust, therefore, in our view the tribunal on such facts is well justified in holding that the claim is just proper and allowable”

ON THE QUESTION OF WINDING UP:

  • An Approved fund can be wound up as per the Circular: No. 595, dated 5-3-1991. Refer to: https://incometaxindia.gov.in/Communications/Circular/910110000000000095.htm

1. The Board had clarified earlier that a gratuity fund, approved under the Income-tax Act, cannot be wound up unless it is neces­sitated by the winding up or discontinuance of the employer’s trade or undertaking, and that the revocation of a gratuity fund cannot be permitted on the basis of a resolution of the trustees and/or beneficiaries.

2. The Board has been requested to consider whether an approved superannuation fund can be allowed to be wound up only when the undertaking of the assessee is wound up or discontinued.

3. Rules 93 and 94 of the Income-tax Rules, relating to superan­nuation funds, are analogous to rules 107 and 108 of the Income-tax Rules relating to gratuity funds. Further rule 3(a) of Part ‘B’ of the Fourth Schedule to the Income-tax Act prescribes that superannuation funds should be established under an irrevocable trust in connection with a trade or undertaking.

4. The Board has, therefore, been advised that an approved super­annuation fund also cannot be wound up unless necessitated by the winding up or discontinuance of the employer’s trade or undertak­ing.

  • REPURCUSSIONS OF CONTRIBUTING TO AN UNAPPROVED FUND CONSIDERING IT TO BE APPROVED:
  • Exemption is provided only to the approved superannuation fund, as stated in:

Commissioner of Income-Tax vs R.K. Mukherjee ( 2001(249) ITR 708)

“In this case the assessee claimed that the amount of Rs. 60,437 received from an approved superannuation fund is not taxable under the Act of 1961. The Income-tax Officer has taken the view that when the conditions laid down in section 10(13) of the Act are not fulfilled, the income of Rs. 60,437 is not exempted.”

“Learned counsel for the Revenue also submits that the payment has been made after the winding up of the scheme, firstly, the Income-tax Officer has not disallowed the claim of the assessee on this ground, secondly, whether the scheme is in existence or not is irrelevant. Under the provisions of section 17(3), once the payment has been made out of the approved superannuation fund that amount cannot be treated as in lieu of salary.”

  • Provisions or sections where company can be liable if its contributing to a not approved fund and has sought exemptions till now:
  • Rule 9, part B, Schedule IV of IT Act 1961 : If a fund or a part of a fund for any reason ceases to be an approved superannuation fund, the trustees of the fund shall nevertheless remain liable to tax on any sum paid on account of returned contributions (including interest on contributions, if any), in so far as the sum so paid is in respect of contributions made before the fund or part of the fund ceased to be an approved superannuation fund under the provisions of this Part.
  • Section 43B IT Act 1961
  • Section 36(1) (IV) IT Act 1961
  • Section 80C IT Act 1961
  • Section 40 (a) (IV) IT Act 1961
  • Section 10(25) IT Act 1961.

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