Income from Salaries, Income Tax, Individuals

IncomeTax/Individuals/Salaried/Retirement Benefits/Provident Fund, Superannuation and Pension

Provident Fund is an important retirement benefit provided to employees and carries several tax implications. From taxation point of view provident funds can be classified as follows :

  • Statutory provident fund

  • Recognized provident fund

  • Un-recognized provident fund

  • Public provident fund

The major issues arising in case of provident funds can be classified as follows :

  • Whether amount contributed by the employee will qualify for deduction under section 80C?

  • What will be the tax treatment of amount contributed by the employer?

  • What will be the tax treatment of annual interest being credited to the provident fund account of the employee?

  • What will be the tax treatment of amount withdrawn from provident fund?

Following chart will answer all the above questions

 

Statutory

Recognised

Un-

Public

Provident

Provident Fund

recognised

Provident

Fund

 

Provident

Fund

   

Fund

 

Employer’s contribution

Exempt from tax

Exempt upto 12% of salary (Note 1)

Exempt from tax

Employer does not contribute to such fund

Employee’s contribution eligible for deduction u/s 80C

  Yes

  Yes

  No

  Yes

Interest credited

 

Exempt from tax

   

to the said fund

Exempt from tax

if rate of interest is upto 9.5%. Interest in excess

Exempt from tax

Exempt from tax

   

of 9.5% is

   
   

charged to tax.

   

Amount received at the time of termination of service

  Exempt from tax

If certain conditions are satisfied, then lump sum amount is exempt from tax

    (Note 3)

  Exempt from tax

   

(Note 2)

   

Notes:

  1. Salary for this purpose will include the following:

  • Basic salary,
  • Dearness allowance, if the terms of service so provide,
  • Commission based on fixed percentage of turnover achieved by the employee.
  • Accumulated balance from a recognised provident fund will be exempt from tax if following conditions are satisfied:
  1.  
  2. If the employee has rendered a continuous service of 5 years or more.

If accumulated balance includes amount transferred from other recognised provident fund, then the period for which the employee rendered service to such previous employer shall also be included in computing the aforesaid period of 5years.

  • If the service of employee is terminated before the period of 5 years due to his ill health or discontinuation of business of the employer or other reasons beyond his control.

  • If on termination, the employee takes employment with any other employer and the balance becoming payable to him is transferred to his account in any recognised fund maintained by such other employer, then the amount so transferred will not be charged to tax.

  • Treatment of payment received from un-recognised provident fund:

Payment on termination will include four components, viz, employee’s contribution and interest thereon and employer’s contribution and interest thereon. The tax treatment of such payments is as follows :

  • Employee’s contribution is not charged to tax; interest thereon is taxed under the head “Income from other sources”.

  • Employer’s contribution as well as interest thereon will be taxable as salary income. However, relief under Section 89 will be available.

Retrenchment compensation

Compensation received at the time of retrenchment is exempt from tax to the extent of lower of the following:

  • An amount of average pay provided to the employee.

  • Maximum amount specified by the Central Government (Rs.5,00,000).

  • Actual amount received.

Aforesaid limit is not applicable to the cases where compensation is paid under any scheme approved by the Central Government. An employee can claim relief in respect of excess amount taxed.

Approved superannuation fund

Approved superannuation fund means superannuation fund which is approved by the Commissioner of Income-tax. In case of approved superannuation fund following questions will arise:

  • What will be the tax treatment of contribution made by the employer?

  • What will be the tax treatment of amount received from approved superannuation fund?

  • Whether amount contributed by the employee will qualify for deduction under section 80C?

With effect from assessment year 2010-11, employer’s contribution to an approved superannuation fund in excess of Rs. 1,00,000 is charged to tax as perquisite.

Employee’s contribution will qualify for deduction under section 80C and interest on accumulated balance is not liable to tax. Payments in following cases will be exempt from tax under section10(13):

  • Payment on death of beneficiary;or

  • Payment to an employee in lieu of, or in commutation of an annuity on his retirement at or after the specified age or on his becoming incapable prior to such retirement;or

  • Refund of contribution to an employee on leaving the service (otherwise than above mentioned reason) to the extent to which such payment does not exceed the contribution made prior to April 1,1962.

  • By way of refund of contributions on the death of a beneficiary.

Payments from new pension scheme

Various issues involved in respect of tax treatment of contribution to New Pension Scheme (NPS) are as follows :

  • Whether amount contributed by the employee will qualify for deduction under section 80CCD?

  • What will be the tax treatment of amount contributed by the employer?

  • What will be the tax treatment of amount received from the scheme?

Following points will answer above questions:

  • As per section 80CCD, an individual who is employed by the Central Government/any other employer on or after January 1st, 2004 or a self-employed assesse can claim deduction under section 80CCD in respect of contribution to NPS.

  • Amount paid/deposited (during the previous year) in assessee’s account, under NPS will qualify for deduction under section80CCD.

  • Amount of deduction will be as follows:

  • Employee’s contribution during the year to notified pension scheme, subject to condition that maximum of 10% of salary is deducted in the year in which contribution is made.

  • Employer’s contribution during the year to notified pension scheme is first included in the income of the assessee, and then such contribution, subject to maximum of 10% of salary, is deducted in the year in which contribution is made.

  • On closure of aforesaid account or in case the employee opts out of the said scheme or on receipt of pension from the annuity plan, credit balance in such pension account for which deduction is claimed and accretion to such account is taxed in the hands of receiver in the year of receipt. If amount received on closure is used for purchasing an annuity plan in the same previous year, then such amount will be exempt from tax.

  • If deduction in respect of above amount is claimed under section 80CCD, then deduction of the same amount cannot be claimed under section80C.

  • Aggregate deduction under sections 80C, 80CCC and 80CCD (1), (i.e., employee’s contribution) cannot exceed Rs.1, 00,000.

 

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