Budget 2020: Tax-Free Employer Contribution Limit to Retirement Funds Capped

In the Union Budget 2020, an update to the upper limit of the tax-free employers’ contribution to retirement funds was announced. According to the update, the contribution towards the National Pension Scheme (NPS), superannuation fund, and recognised provident fund will be capped at Rs.7.5 lakh per annum per employee, with effect from 1 April 2020.

Contributions of employers beyond Rs.7.5 lakh per annum will be considered as a perquisite of the employee and taxed accordingly. The budget document also proposed that any accretion in the form of interest, dividend, or any other amount of similar nature as listed in the previous years to the balance at the credit of the fund can be treated as perquisite with respect to the employer’s contribution; this amount must be included in the total income.

Since the provision will be effective from 1 April 2020, the updated limit will be applicable for tax calculation from the assessment year 2021-22 and the following years. 

As per the existing provisions, the employer contributions to recognised provident fund beyond the specified limit, i.e. exceeding 12% of the salary, is taxable. If the employer’s contribution to an approved superannuation fund exceeds Rs.1.5 lakh, it is treated as perquisite for the employee.

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Similarly, an assessee can get a deduction on contributions to NPS for up to 14% of the salary if contributed by the Central Government and up to 10% of the salary if contributed by any other employer. 

However, the latest update does not consider the combined upper limit for the purpose of deduction on the employer’s contribution. 

Critics say that the provision is giving unfair benefits to employees with a high salary. Employees with a low salary are not allowed to let the employer contribute a large part of his salary to these three funds. On the other hand, employees with a high salary can get the privilege of their employer contributing a large portion of their salary to these funds. 

Consequently, the portion of the salary contributed towards the three funds will be covered under the exempt-exempt-exempt regime. Therefore, the combined upper capping in unfair and undesirable.

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in