As we are all aware that in this hard times of COVID-19 pandemic, government of India has provided various relief to the people and one such benefit includes paying 24% (12% of employer and 12% of employee) share of PF. This benefit is not extended to every establishment, but to the ones having the count of employees not more than 100, and out of which 90% of the employees receive salary less than Rs. 15000/-.
Here we are not going to discuss the detailed provisions of the scheme, nor are we going to discuss the accounting treatment of the assistance received from the government. We are going to discuss the taxability of the assistance received as per the provisions of Income Tax Act, 1961.
Before moving forward we need to understand that in whose hands this amount of assistance received is taxable. In employer’s or in employee’s hands? Or in both? Its simple the one who has received the assistance, in his hands it will be taxed. Further question arises who has received the assistance, thus the one whose liability is being discharged through the assistance, he has received the assistance. Since it was the liability of both employer and employee to pay 12% each, assistance will be treated to be received by both and thus taxable in the hands of employer as well as in the hands of employee.
Now that we have understood that this is taxable in the hands of both so let’s move further and break our discussion in four parts
1. Taxability of employee’s share in hands of employee
2. Taxability of employer’s share in hands of employee
3. Taxability of employee’s share in hands of employer
4. Taxability of employer’s share in hands of employer
Now let’s go one by one
Since employer will be paying 100% of the salary to employee without deducting any share for PF, this whole amount received from the employer will be treated as salary income in hands of Employee.
Assistance received is in nature of compensation for COVID-19 pandemic is exempt as per the provisions of section 10 sub section 10BC of Income Tax Act, 1961.
The said provision is provided for ready reference:-
Any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster, except the amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of any loss or damage caused by such disaster.
Explanation.—For the purposes of this clause, the expression “disaster” shall have the meaning assigned to it under clause (d) of section 2 of the Disaster Management Act, 2005 (53 of 2005);
Note: COVID-19 is notified disaster.
Further benefit of Sec 80C shall not be available to employee as, the amount received from employer was not deposited for PF, and the government assistance which was deposited is already exempt as discussed above.
Employer’s share of 12% will not be taxable in the hands of employee as per provisions of Paragraph 6 of part A of fourth schedule to Income Tax Act, 1961 (assuming it’s a recognized fund).
There will be no treatment in whatsoever manner in hands of employer for employee’s share of assistance, however employer will be getting deduction in respect of total salary paid and amount deposited on account of employee’s share.
Consider and example, employer pay salary of Rs. 100/- to employee. In case of no assistance, employer will pay Rs. 88/- to employee and deposit Rs. 12/- as share of employee to PF. Now since assistance is being received, employer will pay Rs. 100/- to employee and deposit Rs. 0/- as employee share of PF. Thus still getting the deduction of Rs. 100/- though assistance is received.
Majority of the employers are engaged in the business, and we all know an assesse having taxable income under business head must comply with provisions of ICDS. ICDS-VII deals with governments’ grants, but is this ICDS applicable on this assistance too?
ICDS-VII defines government grants as:-
“Government grants” are assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot have a value placed upon them and the transactions with Government which cannot be distinguished from the normal trading transactions of the person.
Since there are no conditions which needs to be complied with to receive the assistance in our discussion, thus ICDS-VII will not be applicable. Let me clear you one thing here, conditions for having less than 100 employee and 90% of which have salary less than Rs. 15000/- is for eligibility and not for compliance.
Will the employer get benefit of the Sec 10(10BC)?
Employer can take benefit of section 10(10BC) for the assistance received from government, however if the exemption is claimed then employer cannot claim deduction for the expense on account of employer’s share of PF as per provisions of sec 14A. However, there can be an alternate treatment too, employer can claim the deduction of employer’s contribution, but in this case exemption will not be available as u/s 10(10BC), as no exemption is provided to extent deduction is allowed. In both the case taxable profit will be same.
Here important point to note is that section 10(10BC) is applicable on individuals only. So what if the employer is other than Individual?
In case of persons, other than individual, there will not be any major effect as on one side employer will claim expense of the PF contribution and on the other side will claim the income of the grant received.
The above views are of the author himself, and article is for informative purpose and thus should not be in any manner be treated as profession advice. No one should react or refrain from doing anything based on above article without any professional advice.