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CBDT prescribes manner to compute annual accretion related to excess contribution made by employer to welfare funds

Notification No. 11 /2021, 05-03-2021 

Under the provisions of the Income-tax Act, the contribution by the employer to the account of an employee in a recognized provident fund is chargeable to tax if such contribution exceeds 12% of salary. Further, the amount of any contribution to an approved superannuation fund by the employer exceeding Rs. 1,50,000 is treated as a perquisite in the hands of the employee. Similarly, the assessee is allowed a deduction under the National Pension Scheme (NPS) for 14% of the salary contributed by the Central Government and 10% of the salary contributed by any other employer. 

Up to Assessment Year 2020-21, there was no combined upper limit for deduction on the amount of contribution made by the employer. The Finance Act, 2020, w.e.f., Assessment Year 2021-22, has inserted sub-clause (vii) to section 17(2) to prescribe an upper limit of Rs. 7,50,000 per annum for deduction in respect of employer’s contribution to NPS, superannuation fund and recognized provident fund. Any excess contribution above Rs. 7,50,000 is chargeable to tax in the hands of the employee. 

Another sub-clause (viia) to section 17(2) has been inserted to provide that any 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 scheme may be treated as perquisite to the extent it relates to the such excess employer’s contribution. The sub-clause has also provided that the Central Board of Direct Taxes (CBDT) shall provide that the manner in which such annual accretion will be computed. 

Now, the CBDT has inserted a new Rule 3B to the Income-tax Rules, 1962 to prescribe the manner for computation of annual accretion under section 17(2)(viia). The board has given the following formula in this regard: 

TP= (PC/2)*R + (PC1+ TP1)*R 

Where, 

(a) TP= Taxable perquisite under section 17(2)(viia) for the current previous year; 

(b) TP1= Aggregate of taxable perquisite under section 17(2)(viia) for the previous year or years commencing on or after 01-04-2020 other than the current previous year. 

(c) PC= Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.50 lakh to the specified fund or scheme during the previous year; 

(d) PC1= Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.50 lakh to the specified fund or scheme for the previous year or years commencing on or after 01-04-2020 other than the current previous year; 

(e) R= I/ Favg; 

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

(g) 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 

In case 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. 

 

CA Vikas Jain - Chief Advisor

Mr. Vikas Jain is a reputed Chartered Accountant possessing in-depth understand...

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CA Vikas Jain

CA Vikas Jain - Chief Advisor

Mr. Vikas Jain is a reputed Chartered Accountant possessing in-depth understand...

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