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Salary to include Provident Fund Contribution as Perks-Budget 2020

salary-to-include-provident-fund--contribution-as-perks-budget-2020

Salaried individuals have a hard time from the Union Budget 2020. Instead of providing any relief in tax rates, a new optional method of taxation regime is introduced without any deduction and exemption.

By another amendment, the employer's contribution to an account of a recognized provident fund, National Pension Scheme (NPS) and superannuation fund of the employee concerned in excess of Rs. 7,50,000 in aggregate for all the three funds in a year is made taxable.


This will be hitting hard for private-sector employees. Government employees are excluded from this amendment.

Employees for whom the employer's contribution to his provident fund account or NPS account or to his superannuation account in excess of the specified limit will become taxable as salary from next year. This provision will hit the private sector employees more than the government employees.

Under the existing provisions of the Act, the contribution by the employer to the account of an employee in a recognized provident fund exceeding 12 percent of salary is taxable

Further, the amount of any contribution to an approved superannuation fund by the employer exceeding Rs. 1,50,000 is treated as perquisite in the hands of the employee

Similarly, the assessee is allowed a deduction under the National Pension Scheme (NPS) for the 14 percent of the salary contributed by the Central Government and 10 percent. of the salary contributed by any other employer

However, there is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer. 

This is giving undue benefits to employees earning a high salary income. While an employee with low salary income is not able to let employer contribute a large part of his salary to all these three funds, employees with high salary income are able to design their salary package in a manner where a large part of their salary is paid by the employer in these three funds. 

Thus, this portion of salary does not suffer taxation at any point of time, since Exempt-Exempt-Exempt (EEE) regime is followed for these three funds. Thus, not having a combined upper cap is iniquitous and hence, not desirable.


Therefore, it is proposed to provide a combined upper limit of Rs. 7,50,000 in respect of employer's contribution in a year to NPS, superannuation fund and recognised provident fund and any excess contribution is proposed to be taxable

Consequently, it is also proposed 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 employer’s contribution which is included in total income.

For this purpose, an amendment is made in section 17 of the Income Tax Act, 1961 vide clause 13 of the Finance Bill, 2020 which reads as follows-


Amendment of section 17.

13. In section 17 of the Income-tax Act, in clause (2), for sub-clause (vii), the following sub-clauses shall be substituted with effect from the 1st day of April, 2021, namely:–

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

(a) in a recognised provident fund;

(b) in the scheme referred to in sub-section (1) of section 80CCD; and

(c) in an approved superannuation fund,

to the extent it exceeds seven lakh and fifty thousand rupees 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 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 any previous year computed in such manner as may be prescribed; and”.


Clause 13 of the Bill seeks to amend section 17 of the Income-tax Act relating to “salary”, “perquisite” and “profits in lieu of salary” defined.

Sub-clause (vii) of clause (2) of the said section provides that the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, shall be treated as perquisite to the extent it exceeds Rs. 1.50 lakh.

It is proposed to amend the provisions of clause (2) of the said section so as to substitute sub-clause (vii) of the said clause to provide that the amount or the aggregate amounts of any contribution made by the employer in respect of the assessee, to the account of an assessee in a recognised provident fund; in the scheme referred to in subsection (1) of section 80CCD; and in an approved superannuation fund shall be treated as perquisite, to the extent it exceeds Rs. 7.50 lakh in the previous year.

It is further proposed to insert a new sub-clause (viia) in the said clause (2) so as to provide that 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 referred to in sub-clause (vii) may also be treated as perquisite to the extent it relates to the contribution referred to in the said new sub-clause (vii), which is included in total income and shall be computed in the prescribed manner.


These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

In this context, the following points are noteworthy-

1. From AY 2021-22, the combined amount of Rs. 7,50,000 will be exempt from tax in case of the employer's contribution to the retirement funds. Any aggregate of the amount deposited by the employer in excess of Rs. 7,50,000 in the retirement funds of an employee will be taxable as income.

2. Any interest or dividend or bonus or any other income on such excess deposit amount is also made taxable. 

In the case of the Growth Scheme of NPS, the funds are valued at NAV and no dividend or bonus is declared on such funds. Any appreciation in the NAV will not come within the purview of income.

No such appreciation of NAV shall be considered as income. This is because it is provided that 'annual accretion by way of interest, dividend or any other amount of similar nature' will only be treated as income. Thus any bonus declared will form part of total income.

It is further provided that the government will notify the manner of computing such income.

3. The employer has to take into account such excess income in the computation of total income of the employee for the purpose of TDS under section 192. Further, the interest or other nature of income on such excess deposit of money shall also be taken into consideration.

4. The interest in the retirement funds is computed on the pool of money comprising employers' contributions, employees' contributions, and the accumulated interest thereon. One needs to bifurcate the interest which is attributable to such excess part of Rs. 7,50,000.

The CBDT will notify the manner in which annual accretion by way of interest, dividend or any other amount of similar nature will be computed for taking the same into income.

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