CBDT vide Notification No. 11/2021 dated 05.03.2021 notified Rule 3B in Income Tax Rules, 1962 related to computation of perquisite for the purposes of section 17(2)(viia) of Income Tax Act, 1961 (“Act”) and for determination of annual accretion by way of interest, dividend, etc. on contribution to Provident Fund (PF) account, NPS account and Superannuation account in excess of Rs. 7,50,000 per annum.
Finance Act, 2020 has amended the provisions of section 17(2)(vii) of the Act 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 (NPS); and in an approved superannuation fund shall be treated as a perquisite, to the extent it exceeds Rs. 7,50,000 in a previous year.
In other words, clause (vii) of section 17(2) provides that perquisites would include the amount of any contributions made by the employer to the account of an employee in a recognised Provident Fund, NPS, etc. to the extent it exceeds Rs. 7.50 Lakh in a year.
Further, Finance Act, 2020 has inserted a new sub-clause (viia) in section 17(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.
In other words, clause (viia) of section 17(2) provides that amount of interest, dividend etc. (known as annual accretion) earned on such funds or schemes to the extent it relates to the employers’ contribution in excess of Rs. 7.50 Lakh in the employees account as stated in clause (vii) above, shall also be included in perquisites to be computed in the prescribed manner.
The above-mentioned amendments are applicable from AY 2021-22.
The manner of computation of such annual accretion in the provident and other welfare funds specifying the method of computation of perquisite u/s 17(2)(viia) is now notified by this Notification 11 of 2021.
Section 17(2) of the Act deals with perquisites to be chargeable to tax under the head ‘Income from Salary’.
Prior to this amendment, the contribution by the employer to the account of an employee in a recognized provident fund exceeding 12% of salary is taxable. Further, the amount of any contribution to an approved superannuation fund by the employer exceeding Rs. 1,50,000 was 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.
However, there was 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 a low salary income is not able to let the 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.
With this objective, the government has introduced the amendment 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 provided 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.
Read the full text of Notification 11/2021 dated 05.03.2021 on Prescribing Rules for Computing Annual Accretion u/s 17(2)(viia)
MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 5th March, 2021
G.S.R. 155(E).—In exercise of the powers conferred by sub-clause (viia) of clause (2) of section 17 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely: –
1. Short title and commencement. —(1) These rules may be called the Income-tax (1st Amendment) Rules, 2021.
(2) They shall come into force from the 1stday of April, 2021.
2. In the Income-tax Rules, 1962, after the rule 3A, the following rule shall be inserted, namely: ‒
“3B. Annual accretion referred to in the sub-clause (viia) of clause (2) of section 17 of the Act.
For the purposes of sub-clause (viia) of clause (2) of section 17 of the Act, annual accretion by way of interest, dividend or any other amount of similar nature during the previous year (hereinafter in this rule referred to as the current previous year) to balance to the credit of the fund or scheme referred to in sub-clause (vii) of clause (2) of section 17 of the Act shall be the amount or aggregate of amounts computed in accordance with the following formula, namely:—
TP= (PC/2)*R + (PC1+ TP1)*R
Where,
TP = Taxable perquisite under sub-clause (viia) of clause (2) of section 17 of the Act for the current previous year;
TP1= Aggregate of taxable perquisite under sub-clause (viia) of clause (2) of section 17 of the Act for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year (See Note);
PC= Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme during the previous year;
PC1= Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year (See Note);
R= I/ Favg;
I=Amount or aggregate of amounts of income accrued during the current previous year in the specified fund or scheme account;
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.
Explanation.—For the purposes of this rule, “specified fund or scheme” shall mean a fund or scheme referred to in sub-clause (vii) of clause (2) of section 17 of the Act.
Note: 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.”.
[Notification No. 11 /2021/F. No. 370142/52/2020-TPL]
GUDRUN NEHAR, Director (TPL-II)
Note: The principle rules were published in the Gazette of India, Extraordinary, Part II, Section 3,sub-section(ii) vide notification number. S.O. 969 dated the 26th March, 1962 and lastly amended vide notification number G.S.R. No. 664(E) dated the 22nd October, 2020
(viia) for Excess Contribution by Employer Over Rs. 750000){kind=link}
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