Feb 2016 witnessed a few important changes for salaried
class assessee enjoying their provident fund bounties. While vide Government
Notification dated 10-02-2016 withdrawl of employer contributions till 58 years of age was
prohibited, Finance Bill 2016
created mayhem over taxability on withdrawl of entire provident fund
accumulations. The amendment was made to
move to the regime of EET (i.e. Exempt, Exempt, Tax) from present regime of
(Exempt, Exempt and Exempt). Although Finance Minister has announced the
retraction of its proposal to tax provident fund withdrawl, there are other
large number of other amendments also with regard to employee benefits, which
have gone unnoticed in this buzz.
In
this article an attempt has been made to discuss the taxability of provident
funds, approved superannuation funds and new pension scheme after taking into
account the amendments proposed by Finance Bill 2016. The taxability of each of
these employee benefit scheme has been discussed with regard to employee
contributions, employer contributions and treatment on maturity/withdrawl.
1. Recognized
Provident Funds
What is Recognised Provident Fund
?
As per Section 2(38) "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 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 (19 of 1952)
a)
Taxability of Employees
Contribution to Recognized Provident Fund
i)
As per Rule 7 of Schedule IV-A
An employee participating in a recognised provident fund shall,
in respect of his own contributions to his individual account in the fund in
the previous year, be entitled to a deduction in the computation of his total
income of an amount determined in accordance with section 80C
ii)
Under Section 80C(2)(vi), there is
deduction for contribution by an employee to a recognised provident fund.
Contributions by government employees under Provident Fund Act 1925 is eligible
for deduction u/s 80C(2)(iv). Contribution to Public Provident Fund under PPF
Act 1968 is eligible for deduction u/s 80C(2)(v) rws 80C(4) whether made in
name of assessee or spouse or child. Deduction u/s 80C is available up to Rs.
150000. Hence no deduction for contributions exceeding Rs. 150000/-. No
deduction u/s 80C is available for contribution to unrecognized provident fund.
b)
Taxability of
Employer’s Contribution to Recognized Provident Fund
i)
As per Section 7 the annual
accretion in the previous year to the balance at the credit of an employee
participating in a recognised provident fund, to the extent provided in rule 6
of Part A of the Fourth Schedule shall
be deemed to be income received by employee
ii)
Extent of Employer's annual contributions deemed
to be income received by employee as per Rule 6 of Schedule IV-A
That
portion of the annual accretion in any previous year to the balance at the
credit of an employee participating in a recognised provident fund as consists
of—
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(a)
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contributions made by the employer in excess of twelve per cent of the salary of
the employee [or Rs. 1,50,000 whichever is less was proposed to
be inserted Wef AY 2017-18 has been rolled back],
Note : Finance Bill 2016 therefore proposed to tax
employer’s contribution to recognized
provident fund in excess of Rs. 1,50,000 . Hence employees whose salary
exceeded Rs. 12,50,000 would have been effected by this amendment. [150000 x
(12/100)=1250000]. However this proposal has also been rolled back .
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(b)
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interest credited on the balance to the credit of the employee
in so far as it is allowed at a
rate exceeding such rate as may be fixed by the Central Government in this
behalf by notification in the
Official Gazette,
[Rate fixed is 9.5% w.e.f. 1-9-2010 -
Notification No. SO 1046(E), dated 13-5-2011.]
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shall be
deemed to have been received by the employee in that previous year and shall be
included in his total income for that previous year, and shall be liable to
income-tax .
iii)
Head of Income for taxability of
Employers’ Contribution
The annual accretion to the balance at the credit of an employee
participating in a recognized provident fund, to the extent to which it is
chargeable to tax under rule 6 of Part A of the Fourth Schedule shall be
chargeable as salary as per Section 17(1)(vi)
iv)
In case of statutory
provident funds and unrecognized provident funds, contribution of employer is
not treated as income received.
c)
Taxability of Withdrawls of
Accumulated Balance from Recognized Provident Fund
i)
As per section 10(12) the accumulated balance due and becoming payable to an
employee participating in a recognized provident fund, to the extent
provided in rule 8 of Part A of the Fourth Schedule is exempt
Amendment
Proposed in Finance Bill 2016 but dropped by Finance Minister
Provided
that nothing contained in this clause shall apply in respect of any amount of
accumulated balance, attributable to any contributions made on or after the 1st
day of April, 2016 by an employee other than an excluded employee, exceeding
forty per cent. of such accumulated balance due and payable in accordance with
provisions of rule 8 of Part A of the Fourth Schedule.
Explanation.—For the purposes of
this clause, the term “excluded employee” means an employee whose monthly
salary does not exceed such amount, as may be prescribed;’;
ii)
Extent of
Withdrawl from recognized provident fund
as per Rule 8 Schedule IV-A
The accumulated balance due and becoming
payable to an employee participating in a recognized provident fund shall be
excluded from the computation of his total income—
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(i)
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if he has rendered continuous service with his employer for a
period of five years or more, or
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(ii)
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64[(iii)
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if, on the cessation of his employment, the employee obtains
employment with any other employer, to the extent the accumulated balance due
and becoming payable to him is transferred to his individual account in any
recognised provident fund maintained by such other employer.
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iv)
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if the entire balance
standing to the credit of the employee is transferred to his account under a
pension scheme referred to in section 80CCD and notified by the Central
Government (Inserted by Finance Bill wef AY 2017-18)
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Explanation.—Where the
accumulated balance due and becoming payable to an employee participating in a
recognised provident fund maintained by his employer includes any amount
transferred from his individual account in any other recognised provident fund
or funds maintained by his former employer or employers, then, in computing the
period of continuous service for the purposes of clause (i) or clause (ii)
the period or periods for which such employee rendered continuous service under
his former employer or employers aforesaid shall be included.]
iii) Calculation
of Tax on premature withdrawl of accumulated balance.as per Rule 9 of Schedule
IV-A
Where the
accumulated balance due to an employee participating in a recognised provident
fund is included in his total income owing to the provi-sions of rule 8
not being applicable, the Assessing
Officer shall calculate the total of the various sums of tax which would have been payable by
the emp-loyee in respect of his total income for each of the years concerned if
the fund had not been a recognised provident fund, and the amount by which
such total exceeds the total of all sums paid by or on behalf of such employee
by way of tax for such years shall be payable by the employee in addition to
any other 66[tax] for
which he may be liable for the previous year in which the accumulated balance
due to him becomes payable.
Note: It means
that tax shall be computed for respective years without giving effect to
deduction for contribution to EPF under section 80C.
Iv )Deduction
at source of tax payable on accumulated balance as per Rule 10 of Sch IV-A.
The
trustees of a recognised provident fund, or any person authorised by the
regulations of the fund to make payment of accumulated balances due to
employees, shall, in cases where sub-rule (1) of rule 9 applies, at the time an
accumulated balance due to an employee is paid, deduct therefrom the amount
payable under that rule and all the provisions of Chapter XVII-B shall apply as
if the accumulated balance were income chargeable under the head
"Salaries".
v)
TDS on Payment of accumulated
balance due to an employee. As per Section
192A inserted wef 01-06-2015
Notwithstanding
anything contained in this Act, the trustees of the Employees'
Provident Fund Scheme, 1952, framed under section 5 of the Employees' Provident
Funds and Miscellaneous Provisions Act, 1952 (19 of 1952) or any person
authorised under the scheme to make payment of accumulated balance due to
employees, shall, in a case where the accumulated balance due to an employee
participating in a recognised provident fund is includible in his total income
owing to the provisions of rule 8 of Part A of the Fourth Schedule not being
applicable, at the time of payment of the accumulated balance due to the
employee, deduct income-tax thereon at the rate of ten per cent :
Provided that no deduction under
this section shall be made where the amount of such payment or, as the case may
be, the aggregate amount of such payment to the payee is less than thirty
thousand rupees:
Provided
further that any
person entitled to receive any amount on which tax is deductible under this
section shall furnish his Permanent Account Number to the person responsible
for deducting such tax, failing which tax shall be deducted at the maximum
marginal rate.
vi)
Facility of Form 15G/15H
However
wef 01-06-2015, the assessee can file form 15G if total income including
premature withdrawl of PF abalance does not exceed exemption limit. Senior
Citizens can file Form 15H where tax payable is NIL even after inclusion of
premature withdrawl of PF balance
vii) In case of
Unrecognized provident Fund or WIthdrawl from provident fund with in five years as per Section 17(3)
Section 17(3) is applicable to payments
other than covered by S.10(12). Section 10(12) applies to accumulated balance
due or payable to employee participating in recognized provident fund to the
extent provided in Rule 8 of Schecule IV-A. Hence section 17(3) shall apply to
following situations:
1)
Amount becoming due or payable from unrecognized
provident fund
2)
Amount from recognized provident fund not
covered by Rule 8 of SCh-IV-A
As per
Section 17(3) profits in lieu of salary" includes any payment (other than
any payment referred to in clause(12) of Section 10) due to or received
by an assessee from an employer or a former employer or from a provident
or other fund to the extent to
which it does not consist of contributions by the assessee or interest on such contributions
Note:
1. On
payment of employee’s own contribution, since it will be return of investment
by employee without enjoying any deduction u/s 80C, there shall be no tax
implication.
2. Interest
on employee’s contribution shall be taxable as Income from Other Sources.
3. Employer’s
Contribution as well as interest on employer’s contribution shall be taxable as
profits in lieu of salary.
viii)
Withdrawl from Stautory
Provident Fund for Government Employees or Public Provident Fund
As per Section 10(11) any payment from provident Fund to
which provident Fund Act 1925 applies [It applies to Government Employees] or
from any other provident fund set
up by the Central Government and notified by it in this behalf in
the Official Gazette i.e. Public Provident Fund under PPF Scheme 1968 is exempt
from tax.
2. Approved
Superannuation Fund
What is Approved Super Annuation Fund:?
As per section 2(6) "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
a) Contribution by an
employee to an approved superannuation fund
U/s
80C(2)(vii) deduction up to Rs. 150000 is available for contribution to
approved superannuation fund.
b)
Taxability of Employer’s Contribution to approved
superannuation Fund
As
per Section 17(2) The amount of any contribution to an approved
superannuation fund by the employer in respect of the assessee, to the extent
it exceeds one lakh rupees is chargeable as perquisites
The Limit being enhanced to Rs.1.50 lacs wef AY
2017-18 to bring parity with section 80C.
c) Withdrawl from approved Superannuation Fund
Section 10(13) exempts
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any payment from an approved superannuation
fund made—
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(i)
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on the death of a beneficiary ; or
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(ii)
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to an employee in lieu of or in commutation
of an annuity on his retirement at or after a specified age or on his
becoming incapacitated prior to such retirement ; or
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(iii)
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by way of refund of contributions on the
death of a beneficiary ; or
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(iv)
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by way of refund of contributions to an
employee on his leaving the service in connection with which the fund is
established otherwise than by retirement at or after a specified age or on
his becoming incapacitated prior to such retirement, to the extent to which
such payment does not exceed the contributions made prior to the commencement
of this Act and any interest thereon
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Amendment Proposed wef AY 2017-18
Section
10(13) further proposes to exempt transfer
to the account of the employee under a pension scheme referred to in section
80-CCD and notified by the Central Government
60% of
Commuted annuity in respect contribution after 01-04-2016 made taxable by
adding proviso
Provided
that any payment in lieu of or in commutation of an annuity
purchased out of contributions made on or after the 1st day of April, 2016,
where it exceeds forty per cent. of the annuity, shall be taken into account in
computing the total income;
3.
New Pension Scheme u/s 80CCD:
a)
Employees Contribution
Section 80CCD(1)
Where
an assessee, being an individual employed by the Central Government on or after
the 1st day of January, 2004 or,
being an individual employed by any other employer,
or any other assessee, being an individual]
has in the
previous year paid or deposited any amount in his account under a pension
scheme notified or as may be notified by the Central Government, he shall,
in accordance with, and subject to, the provisions of this section, be allowed
a deduction in the computation of his total income, of the whole of the amount
so paid or deposited as does not
exceed,—
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(a)
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in the case of an employee, ten per cent of his salary in the
previous year; and
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(b)
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in any other case, ten per cent of his gross total income in
the previous year.]
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Following
sub-section (1B) has been inserted after sub-section (1A) of section 80CCD by
the Finance Act, 2015, w.e.f. 1-4-2016 :
(1B) An assessee referred to in sub-section (1),
shall be allowed a deduction in computation of his total income, [whether or
not any deduction is allowed under sub-section (1)], of the whole of the amount
paid or deposited in the previous year in his account under a pension scheme
notified or as may be notified by the Central Government, which shall not
exceed fifty thousand rupees:
Provided that no
deduction under this sub-section shall be allowed in respect of the amount on
which a deduction has been claimed and allowed under sub-section (1).
b) Employer’s
Contribution
80CCD(2)
Where, in the case of an assessee referred to in sub-section (1), the Central
Government or any other employer
makes any contribution to his account referred to in that sub-section, the
assessee shall be allowed a deduction in the computation of his total income,
of the whole of the amount contributed by the Central Government or any other employer as does not
exceed ten per cent of his salary in the previous year.
Note: As per
Section 7(iii) the contribution made, by the Central Government or any other employer in the previous
year, to the account of an employee under a pension scheme referred to in section 80CCD is deemed
to be income received Further As per Section 17(1)(viii) salary includes the contribution made by the Central Government or any other employer in the previous
year, to the account of an employee under a pension scheme referred to in section 80CCD;
Hence
Contributions by employer in excess of 10% shall become taxable.
c) Taxability
of Withdrawl/Maturity
80CCD(3)
Where any amount standing to the credit of the assessee in his account referred
to in sub-section (1) or
sub-section (1B), in respect of which a deduction has been allowed under that sub-section or sub-section (2), together with the
amount accrued thereon, if any, is received by the assessee or his nominee, in
whole or in part, in any previous year,—
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(a)
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on account of closure or his opting out of the pension scheme
referred to in sub-section (1) or
sub-section (1B); or
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(b)
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as pension received from the annuity plan purchased or taken
on such closure or opting out,
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the whole
of the amount referred to in clause (a) or clause (b) shall be
deemed to be the income of the assessee or his nominee, as the case may be, in
the previous year in which such amount is received, and shall accordingly be
charged to tax as income of that previous year.
Following
proviso proposed to be inserted wef AY 2017-18
Provided that the amount
received by the nominee, on the death of the assessee, under the circumstances
referred to in clause (a), shall not be deemed to be the income of the
nominee
Conversion
into Annuity Plan
(5) For
the purposes of this section, the assessee shall be deemed not to have received
any amount in the previous year if such amount is used for purchasing an
annuity plan in the same previous year.
40% Receipts from New Pension Scheme Exempted by
inserting clause 10(12A) wef AY 2017-18
as under:
(12A) any payment from the
National Pension System Trust to an employee on closure of his account or
on his opting out of the pension scheme referred to in section 80CCD,
to the extent it does not exceed forty per cent. of the total amount payable to
him at the time of such closure or his opting out of the scheme;”;
Explanation.—For the
purposes of this section, "salary" includes dearness allowance, if
the terms of employment so provide, but excludes all other allowances and
perquisites.
Conclusion: 60% of Withdrawl from
recognized provident fund sought to be taxed by Finance Bill 2016 has been
dropped and hence shall continue to enjoy tax exempt status. Employer’s
contribution to recognized fund in excess of Rs. 150000 was also proposed to be
taxed has also been rolled back. Employer’s Contribution to approved
superannuation fund has been exempted till Rs. 150000 to bring it in parity
with deduction for employees contribution. In investment in New Pension Scheme also still
there is no cap for exemption in absolute terms of monetary limit except
percentage limit of 10%. While conversion from new pension scheme to annuity
was already tax exempt, the conversion from recognized provident fund and
approved superannuation fund to new pension scheme has also been exempted. 40%
of amount receivable under new pension scheme and commuted annuity is also
proposed to be exempted from tax. Amount received by nominee under new pension
scheme on death of the contributor has been provided albeit exemption.
Contributors of New Pension scheme already enjoys the benefit of additional
deduction of Rs. 50,000/- u/s 80CCD(1B) over
and above normal aggregate deduction of Rs. 150000 u/s 80C and 80CCD(1).
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