From FY 2020-21, employer’s contributions in excess of Rs 7.5 lakh to Provident Fund, Superannuation Fund, NPS (retirement funds) would be taxable as income of the employee. Also, the annual accretion such as interest on provident fund balance or dividend accruing on such excess contribution becomes taxable in the hands of the employee.
The manner of calculating the taxable perquisite on the accretions by way of interest and dividend is prescribed in rule 3B. The rule though recently notified, employers should consider the annual accretion as perquisite and calculate TDS for the FY 2020-21.
The rules calculate the perquisite value based on the accruals to the account other than the employer/employee contribution. The perquisite value is taken at the ‘rate’ at which the taxpayer earns interest from the account.
The rate is denoted by ‘r’ in the formula prescribed. The annual contributions of employer are multiplied with the ‘rate’ to arrive at the value of the perquisite. Also, for the years beginning FY 2021-22 onwards, the perquisite value of excess employer’s contribution from FY 2020-21 is arrived by multiplying by the ‘rate’. Similarly, for the perquisite earned each year from FY 2020-21, the taxable value of the accretion is arrived by multiplying with the ‘rate’.
In effect, the rule 3B considers the current year’s excess contribution and earlier years’ excess contribution and perquisite as base. However, the calculation applies with effect from FY 2020-21.
Formula prescribed to calculate perquisite value of annual accretion under section 17(2)(viia):
TP= (PC/2)*R + (PC1+ TP1)*R
TP= Taxable perquisite for the purpose of section 17
TP1 = Aggregate of taxable perquisite brought forward from previous years as on 1 April 2020 for the previous year or years commencing on or after 1st day April, 2020 excluding 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 ongoing financial 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 excluding 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.
The employer will need to determine the annual accretion to the provident fund of each employee in the financial year. The task needs to be undertaken after the end of the financial year taking into account the provident fund statement of the employee.
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