Major amendment for salaried employee – Budget 2020

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Our Finance Minister had announced the Budget for Financial year 2020-21 on 01.02.2020 and major amendments were announced. However in the speech there was no mention of any amendment with regard to salaried employee, whereas on going through the Finance Bill we came across a major amendment which will affect many high salaried employee.

As per amendment to sub section 2 of Section 17 which relates to perquisite in hands of employee, it has been proposed to cap the exemption for contribution to recognised provident fund (RPF), pension scheme u/s 80CCD(1) and approved superannuation fund to Rs. 7.5 lakh. Also any interest or dividend or any other income which accrue in relation to above perquisite shall also be included as perquisite.

The amended provision is as under:

“the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer––

(a) in a recognized 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.”

Before this amendment contribution to recognized provident fund and scheme referred u/s 80CCD(1) was included as salary u/s 17(1) of the Income tax act whereas only contribution to superannuation fund above Rs. 1.5 lakh was included u/s 17(2) as perquisite.

Earlier any contribution to recognized provident fund upto 12% of salary was not taxable as salary by virtue of sixth clause of Fourth schedule of the Income tax act.

Whereas with regard to contribution to pension scheme u/s 80CCD, earlier such contribution was a part of salary and entire contribution of employer upto 10% of salary was allowed as deduction u/s 80CCD(2), which shall be available even after the amendment to section 17(2).

Thus the major impact of above amendment is only on contribution of employer in recognized provident fund as earlier such contribution was not part of his salary if it was upto 12% of salary and:

• Contribution to superannuation fund was earlier also included in perquisite if the contribution was above Rs. 1.5 lakh which has now been increased to Rs. 7.5 lakh (including contribution of PF and pension scheme.)
• Whereas earlier entire contribution to NPS was part of salary anyways by virtue of section 17(1).

The memorandum with regard to above amendment read as under:

“Therefore, it is proposed to provide a combined upper limit of seven lakh and fifty thousand rupee 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.”

Points to note:

• As always Finance Bill has amended section 17(2) including contribution to NPS and RPF under perquisites if the combined contribution exceeds Rs. 7.5 lakh, however there is no amendment to section 17(1) which covers to above contributions. Thus, will the amount above Rs. 7.5 lakh taxed under both head or the amount below 7.5 lakh won’t be taxed anywhere.
• As per above memo it seems that the intention is to tax only the contribution above Rs. 7.5 lakh thus corresponding amendments should be made in other provisions of the act.
• Also one more challenge would be to calculate interest, dividend on contribution above Rs. 7.5 lakh and include it in perquisite.

Do share your views with regard to this amendment in comments below.

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