Income Tax 14 Feb,2020
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Why after the budget some component of salary income may be taxed twice?
Ritu GuptaAssistant Manager, Taxmann.com
DIPEN MITTALManager - R & D, Taxmann

The current provisions of sub-clause (vii) of Section 17(2) of the Income-tax Act provide for taxability of employer's contribution to superannuation fund as perquisite in the hands of the employee if such contribution during the year exceeds Rs. 150,000. This clause has been proposed to be amended by the Finance Bill, 2020 by introducing a cap on maximum contribution an employer can make towards recognized provident fund (PF), National pension scheme (NPS) and Superannuation fund (hereinafter collectively referred to as 'employee welfare schemes'). The proposed clause provides that contribution to employee welfare schemes in excess of Rs. 750,000 shall be taxed as perquisite in the hands of the employee.

This amendment has been proposed with an objective to restrict the tax-free benefits extended to the employees in the high-income bracket. All of these funds, i.e., Superannuation fund, Recognized provident fund and National Pension Scheme) fall in the EEE (Exempt-Exempt-Exempt) taxation regime whereby no tax is levied at the time of contribution, accrual of interest and withdrawal if same are within a certain limit. Thus, employees with high salary income are obtaining the undue advantage of this taxation regime by designing their salary package in a manner where a larger part of their salary is paid by the employer by way of contributing to these funds and, consequently, that portion of salary does not suffer taxation at any point. Whereas, an employee with low salary income is not able to get the employer to contribute a large part of his salary to all these three funds. Thus, in order to restrict the benefit derived by employees with high salary income, a combined upper limit of Rs. 750,000 is proposed in the budget for the purpose of deduction on the amount of contribution made by the employer in employee welfare schemes.

This amendment has been proposed with an intention to cap the contribution made by the employer in the said funds, but it may result in double taxation of some component of salary income. Further, the contribution of up to Rs. 750,000 in superannuation fund would now be tax-free, viz-a-viz the previous tax-free limit of Rs. 150,000 (assuming no amount is contributed in other welfare schemes) which does not seem to be the intention of the legislature. Let's analyze the proposed amendment in section 17(2)(vii).

The salary income of an employee is chargeable to tax as per section 15 of the Income-tax Act. However, what shall be included in the 'salary' is defined under section 17. Section 17 contains three clauses (1), (2) and (3) which defines the term 'salary', 'perquisite' and 'profits in lieu of salary', respectively.

As per section 17(1), salary includes wages, pension, gratuity, fees, commission, perquisites, profits in lieu of salary, advance salary, leave encashment, employer's contribution to the recognized provident fund in excess of 12% of salary and employer's contribution to National Pension Scheme.

Section 17(2) comprises of eight sub-clauses, inter-alia, sub-clause (i) to sub-clause (viii) provide for taxability of various facilities provided by an employer to his employee. sub-clause (vii) of section 17(2) currently talks about perquisite arising from the employer's contribution to superannuation fund only. The said clause is now proposed to be amended by the Finance Bill, 2020 by including employer's contribution to PF and NPS within the ambit, if the aggregate amount of contribution in welfare schemes crosses the limit of Rs. 750,000

Here, it is to be noted that the employer's contribution to PF and NPS are already included in the definition of salary due to Section 17(1). Thus, if employer's contribution to PF and NPS is treated as perquisite (a taxable component of salary) by virtue of a proposed amendment to section 17(2)(vii) then there will be double taxation in the hands of the employee. First, when employer's contribution to these funds is taxed due to specific inclusion under section 17(1) and subsequently when the same amount is taxed as perquisite under section 17(2)(vii) on crossing the threshold.

Let's figure out this with the help of an example.

Mr. X, working in ABC Ltd., draws the following amount of emoluments from the company:

Particulars Amount (in lakhs)
Basic Pay 60
Commission 20
Employer's contribution to recognized provident fund 12
Employer's contribution to NPS 8
Employer's contribution to the superannuation fund 10
Total 110

Amount (in lakhs)

Particulars Before Amendment After Amendment
Basic Pay [Section 17(1)] 60 60
Commission [Section 17(1)] 20 20
Employer's contribution to recognized provident fund (in excess of 12% of basic pay) [Rs. 12 lakh (less) Rs. 7.2 lakh (Rs. 60 lakh * 12%] [Section 17(1)] 4.8 4.8
Employer's contribution to NPS [Section 17(1)] 8 8
Employer's contribution to the superannuation fund in excess of Rs. 1.5 lakhs [Old Section 17(2)(vii)] 8.5 -
Perquisite arising from Employer's contribution to the superannuation fund, PF and NPS in excess of Rs. 7.5 lakhs [New Section 17(2)(vii)] - 22.5
Income chargeable to tax under the head "Salary" 101.3 115.3

In the instant case, if we consider the proposed amendment to section 17(2)(vii) then Mr A would be liable to declare his salary income as Rs. 115.3 lakh. Whereas, the total amount he receives from the employer is just Rs. 110 lakh. This is happening because of the double taxation on the amount of contribution made by the employer to PF and NPS which is further explained as under:

Fund Employer's contribution [A] Taxable as per section 17(1) [B] Taxable as per new section 17(2)(vii) [C] Total amount taxable [D= B+C] Differential amount on which tax is levied twice [E= D-A, if positive]
PF 12 4.8 12 16.8 4.8
NPS 8 8 8 16 8
Superannuation Fund 10 - 2.5 2.5 -
Total 30 12.8 22.5 35.3 12.8

Further, in the instant case, the amount of contribution made by the employer in the superannuation fund is Rs. 10 lakh. However, due to the proposed amendment in section 17(2)(vii), only Rs. 2.5 lakh is chargeable to tax.

The proposed amendment in section 17(2)(vii) is leading to absurd taxability in the hands of an employee because as per section 17(1), the full amount of contribution made by the employer to NPS is already taxable in the hands of the employee. Further, contribution to recognized provident fund is also taxable where it exceeds 12% of the salary of the employee.

Thus, logically, employees with high salary income can escape from the tax liability only when their employer contribute the substantial amount in recognized provident fund and that too within the limit of 12% of salary. Thus, the amendment should have been made only to provide for the upper limit of Rs. 7,50,000 in case of employer's contribution to recognized provident fund and existing provision relating to taxability of superannuation should remain intact.