Tuesday, November 29, 2022

Taxation of Employer’s Contribution to Retired Fund: Here’s how it affects high-income individuals

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A new regulation was introduced by the Government of India through the Finance Act 2020 effective from FY 2020-21. With this regulation, the employer contributes to the Provident Fund (PF), Superannuation Fund (SAF) and National Pension Scheme (NPS; now further referred to as specified funds), in excess of Rs 750,000, in each financial year. Will be considered payable. In the hands of employees.

In addition, any accretion (ie, interest, dividend, etc.) on taxable contributions (exceeding Rs. 750,000) will also be treated as taxable in the hands of the employee.
It was observed by the government that employees earning high salary income prepare their salary package in such a way that a major part of their salary is paid by the employer as contribution to these three funds, which is not considered taxable. used to go. The above provision was added to the Act with a view to restricting the benefits received by such high paid persons.

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Recently, the Central Board of Direct Taxes (CBDT) issued a circular inserting a new rule 3B, stating the manner of computation of taxable, to the tune of Rs 7,50,000 (for specified accruals) on the employer contribution. More than). In addition, an employer will be required to deduct and deposit taxes on the same.

Rule 3B provides a formula for calculating taxable value:

TP= (PC/2)*R + (PC1+ TP1)*R

*Note: Where the amount of TP1 and PC1 exceeds the opening balance of the specified fund, then the amount in excess of opening balance shall be ignored for the purpose of computing the amounts of TP1 and PC1.
In view of the above formula, an example has been given below as reference:
(Amounts in Rs)

Applying the definitions in the above example:

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