Employer’s Contribution to NPS above Rs. 750000 after Finance Act, 2020 - A case of Double Taxation: Finance Act, 2020 has amended the provisions of Income Tax Act, 1961 related to computation of salary income of employees more especially the high earners'.
This time the amendment is carried out in the provisions of section 17(2) of the Act which deals with taxability of perquisites being provided by the employers to the employees.
By an 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 from FY 2020-21 (AY 2021-22).
This article will keep the focus on the employer's contribution to the National Pension Scheme (NPS) only and its impact on the employee concerned is discussed.
Before we start the discussion, we need to under the pre-amended position of the law in two limbs-
1. Computation of Salary Income,
2. Exemption for NPS
3. Deduction for NPS
The provisions of Income Tax Act inter alia requires the followings to be included in the Salary Income -
Under section 17(1)
As per Clause (viii) of Section 17(1), ‘salary’ includes inter alia 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 which is known as National Pension System or NPS.
Under section 17(2)
As per Clause (vii) of section 17(2), perquisite includes inter alia the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds Rs. 1,50,000.
NPS Exemption rules
On maturity: Section 10(12A) provides for exemption from income tax to an assessee including an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD (NPS) to the extent 60 per cent of the total amount payable to him at the time of such closure or his opting out of the scheme. In other words, 60 per cent of the lump sum withdrawals at the time of closure of account on retirement is exempt from income tax.
On Partial Withdrawal: Section 10(12B) provides for exemption from the partial withdrawal of amount from NPS account.
It provides that any payment from the National Pension System Trust to an employee under the pension scheme referred to in section 80CCD i.e NPS, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013) and the regulations made thereunder, to the extent it does not exceed 25 per cent of the amount of contributions made by him;
Pension scheme referred to in section 80CCD
The notified pension scheme for claiming deduction under section 80CCD is New Pension Scheme which is notified vide Notification F.N. 5/7/2003- ECB&PR dated 22.12.2003.
As per the notification, the only contribution to the Tier-I account of the NPS qualifies for deduction u/s 80CCD. The contribution to the Tier-II account does not qualify for the income-tax deduction.
However, from FY 2019-20, the contribution to Tier-II account is now extended for claiming deduction under section 80C for government employees with a lock-in period of three years,
Deduction for contribution to NPS account under section 80CCD
1. The deduction under this section is available only for contribution to the 'New Pension System' (NPS).
2. The deduction is available only to an Individual who is-
(i) a central government employee, or
(ii) a private sector employee, or
(iii) a self-employed.
3. The contribution to an NPS account made by the following persons qualify for the deduction from the gross total income of the assessee or individual-
(i) by the central government, for a central government employee,
(ii) by the employer of the individual, for a private sector employee,
(iii) by the individual himself.
4. There are three types of deduction available under this section for contribution to the NPS Tier-I account. These are:
(i) Under section 80CCD(1): Deduction is available for the whole amount of employee's or self contribution to the NPS account subject to the following ceiling-
(a) in the case of an employee (both central government and private sector), 10 per cent of his salary of the previous year,
(b) in the case of a self-employed individual, 20 per cent of his 'Gross Total Income'.
Salary for this purpose means Basic Salary and Dearness Allowance (D.A.).
(ii) Under section 80CCD(1B): An additional deduction, subject to a maximum of Rs. 50,000 is available to an Individual if he contributes any sum to the NPS Tier-I account in a financial year.
(iii) Under section 80CCD(2): An additional deduction under sub-section (2) is available for the employer's contribution to the NPS account of the employee. The deduction is limited to -
(a) 14 per cent, where such contribution is made by the Central Government,
(b) 10 per cent, where such contribution is made by any other employer
of the salary of the employee of the previous year.
NPS is a contributory pension fund. The Central Government contributes its share of the contribution to the employees' fund. If a private-sector employer enrols for NPS, then the employer also contributes to the employees' NPS account. Unlike EPF, it is not mandatory for a private-sector employer to enrol in the New Pension System. It is voluntary for them. However, once enrolled the employees get an additional tax benefit for the employer's share of contribution, which is not available in the case of EPF. In the case of the employer's share of contribution, the only tax benefit is that the same is not regarded as income of the employee. No further tax benefit is given to the employee for the employer's contribution to EPF. However, in the case of NPS, there is one drawback. The employer's share of contribution to the NPS account of the employees is regarded as 'Salary' income of the employee. In effect, there is no additional tax benefit of the employer's share of contribution to the NPS account, as it appears.
This was the position with respect to contribution to the NPS account by the employer and employee before the amendment introduced by the Finance Act, 2020.
In this backdrop, let us now focus on the amendments enshrined by the Finance Act, 2020.
The amendment is carried on in section 17(2)(vii) of the Act only. As stated above, this provision only covers a contribution to an approved superannuation fund by the employer in excess of Rs. 1,50,000 as a perquisite of the employee.
This clause (vii) is now amended and the scope of perquisite expanded as well as limit enhanced.
The new clause (vii) now includes a contribution to the following funds by the employer as perquisite if the aggregate amount exceeds Rs. 7,50,000 in a financial year-
(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,
A new clause (viia) is added to provide for perquisite in respect of interest or dividend or other similar accretion to the year-end balance of the above funds to the extent it is related to the above-mentioned perks considered contributions shall also be regarded as perquisite. The CBDT will prescribe the Rules how to compute the interest etc in such cases.
The discussion is hence confined to new amended clause (vii) only.
The text of the relevant amended provision is reproduced below-
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”.
Section 13 of the Finance Act, 2020 amended section 17 of the Income-tax Act relating to “salary”, “perquisite” and “profits in lieu of salary” defined.
Prior to the amendment, Sub-clause (vii) of clause (2) of section 17 provided 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. 1,50,000.
The provisions of clause (2) of the said section are amended 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. 7,50,000 in a previous year.
Further, a new sub-clause (viia) is inserted 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.
This amendment in section 17(2)(vii) will benefit those where employers were contributing more than Rs. 1,50,000 to the superannuation fund of the employees since the limit is enhanced to Rs. 7,50,000. The limit of tax-free contribution thus gets extended, if other funds are not involved.
The provisions of clause (2) of the said section are amended 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. 7,50,000 in a previous year.
Further, a new sub-clause (viia) is inserted 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.
This amendment in section 17(2)(vii) will benefit those where employers were contributing more than Rs. 1,50,000 to the superannuation fund of the employees since the limit is enhanced to Rs. 7,50,000. The limit of tax-free contribution thus gets extended, if other funds are not involved.
The intention of the legislature behind the amendment - Rationalization of tax treatment of employer’s contribution to recognized provident funds, superannuation funds and national pension scheme.
Under the existing provisions of the Act, the contribution by the employer to the account of an employee in a recognized provident fund exceeding twelve per cent. 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 National Pension Scheme (NPS) for the 14 per cent of the salary contributed by the Central Government and 10 per cent 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 benefit to employees earning 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.
This amendment is brought in with an intention to restrict the employer's contribution in a year to NPS, superannuation fund and recognised provident fund, but it may result in double taxation of salary income which may be the unintended intention of the legislature. Let's analyze the proposed amendment in section 17(2)(vii) with respect to contribution to NPS only.
Employer’s contribution to NPS is already included in the definition of salary income under section 17(1)(viii). The same amount of employer’s contribution in excess of Rs. 7,50,000 is again included as perquisite under section 17(2)(vii).
Example: The annual Basic Salary income of Mr A for the FY 2020-21 is Rs. 80,00,000. His employer contributes 14% of the basic salary to the NPS account of the employee. Thus the annual contribution comes to Rs. 11,20,000. Computation of Mr A’s salary income for the FY 2020-21 is given below-
Table-1
Particulars
|
Amount
(in Rs.)
|
Basic
Salary
|
80,00,000
|
Add:
Employer’s contribution to NPS u/s 17(1)(viii)
|
11,20,000
|
Add:
Perquisites
Employer’s
contribution to NPS u/s 17(2)(vii) in excess of Rs. 7,50,000
|
3,70,000
|
Total
Salary Income
|
94,90,000
|
Less:
Standard Deduction u/s 16(iia)
|
50,000
|
Less:
Professional Tax
|
2,400
|
Net Income from Salary
|
94,37,600
|
From the above table, it can be seen that Rs. 3,70,000 is already included in the computation of salary income by virtue of section 17(1) when the full amount of contribution of Rs. 11,20,000 to NPS account is added. The same is again added to computation by virtue of amended section 17(2)(vii) as a perquisite. Since both the sections are independent, both sections will apply and it is not the option of the employee to choose any one provision.
The story does not end here. Let us analyse the impact of the amendment with the deduction allowed u/s 80CCD. Under section 80CCD(2) a deduction is allowed from the Gross Total Income of the employee for the employer's contribution to the NPS account. However, this is subject to the following ceilings-
(i) 14% of the salary income if the employer is the central government
(ii) 10% if the employer is a state government or any other employer from the private sector.
Table-2
Particulars
|
Amount
(in Rs.)
|
|
Central Government
|
Other Employer
|
|
Basic
Salary
|
80,00,000
|
80,00,000
|
Add:
Employer’s contribution to NPS u/s 17(1)(viii)
|
11,20,000
|
11,20,000
|
Add:
Perquisites
Employer’s
contribution to NPS u/s 17(2)(vii) in excess of Rs. 7,50,000
|
3,70,000
|
3,70,000
|
Total
Salary Income
|
94,90,000
|
94,90,000
|
Less:
Standard Deduction u/s 16(iia)
|
50,000
|
50,000
|
Less:
Professional Tax
|
2,400
|
2,400
|
Net Income from Salary
|
94,37,600
|
94,37,600
|
Deduction
u/s 80CCD(2)
|
11,20,000
|
8,00,000
|
Total Income
|
83,17,600
|
86,37,600
|
The above table reveals that there is an additional impact of Rs. 3,70,000 in total income due to the perquisite of the employer’s contribution to NPS account. The situation is worse in the case of state government or private sector employees. The impact of double taxation can be seen in these cases. This is due to the fact that other than central government employees, the deduction is allowed for 10 per cent only whereas 14 per cent contribution is added to the total income. Hence, the differential 4 per cent as well as contribution to NPS in excess of Rs. 7,50,000 gets added.
This comes to the addition of Rs. 3,20,000 (Rs. 11,20,000 - 8,00,000 deduction u/s 80CCD(2)) and Rs. 3,70,000 (perquisite) which aggregates Rs. 6,90,000. Hence, Rs. 3,20,000 is already taxed even before the amendment. After the amendment, additionally Rs. 3,70,000 is added. As per the legislative intention, only Rs. 50,000 (Rs. 3,70,000 - 3,20,000) should have been added.
|
Particulars
|
Amount
(in Rs.)
|
|
Amount included u/s
17(1)(viii)
|
11,20,000
|
|
Amount included u/s 17(2)(vii)
|
50,000
|
|
Less: Deduction u/s 80CCD(2)
|
8,00,000
|
|
Net
NPS contribution included
|
3,70,000
|
The incidence of total income will be higher if the employee chooses the new regime of tax under section 115BAC since in that case standard deduction of Rs. 50,000 and deduction for professional tax will not be allowed.
The amendment in section 17(2)(vii) leads to an absurdity where the full amount of employer’s contribution to NPS is taxed under section 17(1) and then the same is once again taxed in the hands of the employee as per the amended section 17(2).
Further, as per NPS rules, only 60% of the lump sum withdrawals from the NPS fund is tax-free at the time of retirement. The balance of 40% of the fund balance is compulsorily required to be used for the purchase of an annuity. This rule was made since EEE status is given to NPS. When the contribution to NPS fund is already taxed in full as perquisite in excess of Rs. 7,50,000 under section 17(2), allowing withdrawal of 60% of those contributed amounts is wholly unjustified. However, no such suitable change is proposed or made in the NPS withdrawal rules.
NPS is a social security tool for investment. Taxing the same at different levels would definitely defeat the purpose of social security since many employers may realign the salary structure of the employees to escape the double taxation of employer’s contribution to NPS contribution in the hands of the employees.
Further, as stated above, the double taxation of employer’s contribution to NPS contributions might not be the intention of the legislature but the manner in which the law is drafted is interpreted so.
Double taxation is allowed if statute so provides
“It is a fundamental rule of law of taxation that, unless otherwise expressly provided, income cannot be taxed twice. A taxing Statute should not be interpreted in such a manner that its effect will be to cast a burden twice over for the payment of tax on the taxpayer unless the language of the Statute is so compelling that the court has no alternative than to accept it. In a case of reasonable doubt, the construction most beneficial to the taxpayer is to be adopted.”
This is the observation made by the Hon’ble Supreme Court in the case of Mahaveer Kumar Jain Vs CIT in Civil Appeal No. 4166 of 2006 pronounced on 19.04.2018.
Similar decisions were also rendered by the Hon’ble Supreme Court in the case of Laxmipat Singhania vs. Commissioner of Income Tax, U.P. (1969) 72 ITR 291 and Jain Brothers and Others vs. Union of India and Others (1970) 77 ITR 107.
In Jain Brothers case (supra), it has been held as under-
“It is not disputed that there can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the subject twice over to the same tax….. If any double taxation is involved, the Legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over”
Normally, an income cannot be taxed twice unless it is expressly provided in law. The above ratio of the decision of the Supreme Court establishes this law. This is thus a well-settled legal principle that if the taxing statute provides double taxation of an income the same does not become ultra vires since the legislature has constitutional powers to tax an income through law.
The basic principle that emerges from the above decisions is that there can be double taxation only if the legislature has distinctly enacted it in express words. In other words, there should be express provision to that effect. One should not interpret a taxing statute in such a manner that it will give the effect of double taxation.
In this backdrop, the only question remains to be decided is whether in fact there is a specific provision for including the income twice in the computation of salary income of an employee for employer’s contribution to NPS - once under section 17(1) as salary and again under section 17(2) as perquisite.
As stated earlier, section 17(1) and section 17(2) has to be applied separately, hence the same employer’s contribution to NPS account is included in total income twice under separate provisions. But this does not corroborate with the intention of the amendment.
Section 17(1) was already in the statute when the amendment in section 17(2)(vii) was proposed. Hence it was well within the knowledge of the legislative. However, the Parliament in its own wisdom decided to introduce the amendment but with an intention.
The memorandum states that the legislative intention is to tax that income which never suffers any tax at any point of time due to EEE status of NPS. The explanatory memorandum only discussed the deduction that is allowed for employer's contribution to NPS under section 80CCD(2), it did not mention anything about the existing provision of inclusion of the employer's contribution to NPS under section 17(1)(vii) as 'salary'. In case of employer’s contribution to NPS, the same is anyway included in total income vide section 17(1)(viii). Even though it is asserted that the same is allowed as a deduction but it is not the same for all employees as seen above in Table-2.
Section 17(1) was already in the statute when the amendment in section 17(2)(vii) was proposed. Hence it was well within the knowledge of the legislative. However, the Parliament in its own wisdom decided to introduce the amendment but with an intention.
The memorandum states that the legislative intention is to tax that income which never suffers any tax at any point of time due to EEE status of NPS. The explanatory memorandum only discussed the deduction that is allowed for employer's contribution to NPS under section 80CCD(2), it did not mention anything about the existing provision of inclusion of the employer's contribution to NPS under section 17(1)(vii) as 'salary'. In case of employer’s contribution to NPS, the same is anyway included in total income vide section 17(1)(viii). Even though it is asserted that the same is allowed as a deduction but it is not the same for all employees as seen above in Table-2.
Conclusion
On careful consideration and interpretation with the intention of the amendment and after following the judicial precedents, one may follow to add Rs. 50,000 additionally as perquisites under section 17(2)(vii). Nevertheless, it will give rise to litigation to decide the question. Hence, it is imperative for the CBDT to issue a clarification in this respect.
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