With effect from the financial year 2020-21, the excess contributions made by the employer to EPF, NPS and retirement funds will be taxed as perquisites in the hands of an employee. The new provisions have come up with new responsibilities for the employers as they are required to calculate the income appropriately and withhold taxes on the same.
To rationalise the tax treatment of employer’s contribution to various retirement funds (i.e., Employees’ Provident Fund (EPF), Superannuation Fund (SAF) and National Pension Scheme (NPS)), a new provision to tax such contributions above Rs 7.5 lakh in the employee’s hands was introduced with effect from financial year 2020-21. Further, any annual accretion on such excess contribution is also now taxable in the employee’s hands. This means that interest, dividend etc. received from the excess contributions will also be taxable in the hands of the employee.
Prior to financial year 2020-21, only contributions exceeding Rs 1.5 lakh towards SAF were considered as taxable perquisite in the employee’s hand. However, the employer contributions to EPF and NPS (subject to a specified percentage of the salary) were exempt without any maximum monetary limit.
With effect from financial year 2020-21, the excess contributions made by the employer will be taxed as perquisites in the hands of an employee. Taxpaying salaried individuals for whom the new provision will be applicable should make sure that the excess contributions to these retirement funds and the accretion thereon are correctly filed in their income tax return (ITR) for the financial year 2020-21. If this is not done, one might get an income tax notice from the tax department.
Before we look at how to file the excess contribution amount in one’s ITR, let us understand how the new provision will work with the help of an illustration for two employees, Atharva and Aayush.
Table 1: Calculation of perquisites taxable in the employee’s hand on account of excess employer’s contribution to specified funds (EPF, SAF, NPS) and accretion thereon
Amount in Rs
Amount in Rs
|Employer’s contribution to EPF||B = 12%*A||2,40,000||5,40,000|
|Employer’s contribution to NPS||C = 10%*A||2,00,000||4,50,000|
|Employer’s contribution to SAF||D||1,50,000||1,50,000|
|Total Employer’s contribution to specified funds||E = B+C+D||5,90,000||11,40,000|
|Excess contribution over and above Rs 7.5 lacs (assumed to be EPF)||F = E-7,50,000||NA||3,90,000|
|Annual accretion accrued on excess contribution (Refer Table 2 below)||G||NA||15,756|
|Taxable perquisite||F = D + E||NA||4,05,756|
The Central Board of Direct Taxes (CBDT) notified Rule 3B of the Income Tax Rules, 1962 (Rules) via a notification dated March 5, 2021, detailing the methodology to calculate the accretion on the excess contribution. Accordingly, the following formula has been prescribed to calculate the accretion on such funds-
TP = (PC/2)*R + (PC1+TP1)*R
- TP = Taxable Perquisite (i.e., accretion on excess contribution) for the current financial year
- TP1 = Aggregate of taxable perquisite (under the new provision) for the financial year or years commencing on or after 1 April 2020, other than the current financial year
- PC = Aggregate of principal contribution made by the employer above Rs 7.5 lacs to the specified funds, during the current financial year
- PC1 = Aggregate of principal contribution made by the employer above Rs 7.5 lacs to the specified funds for the financial year or years commencing on or after 1 April 2020, other than the current financial year
- R = Interest credited/ Average balance
Let us apply this formula to calculate the annual accretion on excess contribution in Atharva’s case. Do keep in mind that here we have assumed that excess contribution in this example came from his EPF.
Table 2: Calculation of annual accretion on excess contribution as per Rule 3B of the Rules
Amount in Rs
|Opening Balance of EPF as on 01 April 2020||A||40,00,000|
|Employer’s contribution to EPF||B||5,40,000|
|Employee’s contribution to EPF||C||5,40,000|
|Total balance before interest||D = A + B + C||50,80,000|
|Interest assumed @ 8.5%|
(Calculated on equated basis for contributions made uniformly throughout the year)*
|Closing balance of EPF as on 31 March 2021||F = D + E||54,62,075|
Calculation of taxable perquisite: TP = (PC/2)*R + (PC1+TP1)*R
|Interest credited to EPF during FY 2020-21||I||3,82,075|
|Average balance of EPF account (A + F)/2||Favg||47,31,038|
|Rate||R = I/Favg||8.08%|
|Principal Contribution made by employer in excess of Rs 7.5 lacs during the FY 2020-21 (F in Table 1)||PC||3,90,000|
|Principal Contribution made by employer in excess of Rs 7.5 lacs for financial years commencing on or after 1 April 2020||PC1||NIL (as it is the first year)|
|Aggregate taxable perquisite of financial years commencing on or after 1 April 2020||TP1||NIL (as it is the first year)|
|Taxable perquisite [(PC/2)*R + (PC1+ TP1)*R]|
[(3,90,000/2)*8.08% + (0+0)*8.08%]
* In case the interest is credited to the EPF account, the employee can take the same. Otherwise, this will have to be calculated based on the notified interest rate.
In the above illustration, the income of Rs 4,05,756 (3,90,000 + 15,756) has become taxable in Atharva’s hands-on account of the new provisions introduced in the Finance Act 2020.
Even though the methodology to calculate the accretion was notified by CBDT in March 2021, the newly inserted provisions still have few ambiguities which need clarity. Some of the ambiguities are:
- There is a lack of clarity on which fund should be considered to determine excess contribution if there is a contribution by the employer to all three funds, i.e., EPF, NPS and SAF.
- The employer may not have access to all relevant data required to calculate the annual accretion except for the annual contribution to these funds. Information like the earnings of the fund, opening and closing balance of the funds are more likely to be available with the employees only after the close of the financial year. This may lead to lesser tax deduction from salary.
- Further, it may be easier to ascertain the accretion by way of interest to EPF. However, there is no such accretion to NPS and SAF which usually operate on the basis of Net Asset Value (NAV) akin to growth-oriented mutual funds and applying the prescribed formula may be difficult for such funds.
It is important to correctly report the excess employer contribution and accretion thereon in the income tax return for the financial year 2020-21. Also, it should be noted that the employee should always choose the correct ITR form based on his/her sources/amount of income, otherwise, he/ she may end up receiving a notice from the Income Tax Department.
The different types of ITR forms applicable to salaried individuals (who do not have any business income) and the reporting requirements of the excess employer contribution and accretion are provided below:
|ITR Form||Applicability||Reporting of excess employer contribution and accretion thereon in the ITR Form|
|ITR 1 (SAHAJ)||Resident and an ordinarily resident individual whose total income is upto Rs 50 lakh; andWho has income from salary, pension, a single house property, other sources, family pension, agriculture income of Rs 5,000||Required to be reported as part of Perquisites in the Salary Schedule|
|Individual who is not eligible for filing ITR-1; andWho does not have Income from Business or Profession?||Separate reporting is required in the Salary Schedule by selecting the appropriate drop down provided in the column Perquisites –|
Contribution in excess of Rs 7.5 lacs to be reported by selecting –Contribution by the employer to fund and scheme taxable under section 17(2)(vii)
Annual accretion to be reported by selecting –Annual accretion by way of interest, dividend etc. to the balance at the credit of fund and scheme referred to in section 17(2)(vii) and taxable under section 17(2)(viia)
The new provisions have come up with new responsibilities for the employers as they are required to calculate the income appropriately and withhold taxes on the same. They are also required to report this income in Form 16 and Form 12BA. Similarly, employees need to report the excess amount of the employer’s contribution to specified funds and accretion thereon, in the Income Tax Return. Also, it is important for both employer and employee to maintain the records related to the excess contribution and accretions every year for appropriate tax withholding and reporting in the income tax return.
Therefore, it is important that one must keep all the provisions in mind while filing the Income Tax Return, in order to be compliant.
(The writer is Tax Partner, EY India. Views expressed are personal)