• Jun 06, 24
• bhushanbjain
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The employer’s contribution to the incometaxNational Pension System (NPS) is eligible for a deduction under Section 36(1)(v) of the Income Tax Act, 1961. The deduction is available up to 10% of the salary (basic salary plus dearness allowance) of the employee. This deduction is applicable from the assessment year 2012-13 onwards.

For central government employees, the employer’s contribution under incometax rate has been enhanced to 14% w.e.f. 01.04.2019.

The deduction under Section income tax 36(1)(v) is over and above the deduction available under income tax Section 80C of the Income Tax Act. Section 80C allows a deduction of up to Rs.1.5 lakh on investments made in various saving schemes, including the NPS.

To claim the deduction under Section incometax36(1)(v), the employer must submit a certificate from the pension fund manager to the employee’s income tax return. The certificate must contain the following information:

• The name of the employee
• The PAN of the employee
• The amount of contribution made by the employer
• The date of contribution
• The NPS scheme in which the contribution was made

The employer’s contribution to theincometax NPS is a valuable tax saving option for both employers and employees. It can help to reduce the overall tax liability and provide a secure retirement income tax for the employee.

EXAMPLES

• Tamil Nadu: 12% of the employee’s basic salary and dearness allowance.
• Tamil Nadu: 10% of the employee’s basic salary and dearness allowance.
• Karnataka: 8% of the employee’s basic salary and dearness allowance.
• Tamil Nadu: 10% of the employee’s basic salary and dearness allowance.
• Delhi: 12% of the employee’s basic salary and dearness allowance.

FAQ QUESTIONS

• What is the maximum amount of employer’s contributionincometax that is eligible for tax deduction under Section 36(1)(v)?

The maximum amount of employer’s contribution under incometax that is eligible for tax deduction under Section 36(1)(v) is 10% of the employee’s salary (basic salary + dearness allowance).

• Can the employer contribute more than 10% of the employee’s salary?

Yes, the employer can contributeincometax more than 10% of the employee’s salary, but the excess amount will not be eligible for tax deduction.

• What are the documents required to claimincometaxdeduction for employer’s contribution to NPS?

The following documents are required to claim tax deduction for employer’s contribution to NPS:

* NPS contribution statement from the NPS administrator

* Salary slips of the employee

* Income tax return form

• When can the employer claim tax deduction for its contribution to NPS?

The employer can claim tax deductionincometax for its contribution to NPS in the same assessment year in which the contribution is made.

• What are the benefits of the tax deductionincometax for employer’s contribution to NPS?

The tax deduction forincometax employer’s contribution to NPS can help the employer to save a significant amount of tax.

CONTRIBUTION TOWARDS APPROVED GRATUITY   FUND

Section 36(1) of the Income Tax Act, 1961 allows a deduction for contribution made by an employer to an approved gratuity fund for its employees.

This can help the employer to improve its financial position and also provide a better retirement benefit to its employees.

The deduction is allowed up to a maximum amount of incometax10 times the average salary of the employee for the last 10 months of service.

The average salary is calculated by incometaxtaking the sum of the employee’s salary for the last 10 months of service and dividing it by 10.

For example, if the average salary of an employee under incometax is Rs.10,000 per month, the maximum deduction that the employer can claim is Rs.100,000.

The contribution towards theincometax approved gratuity fund is not taxable in the hands of the employee.

Here is an example of how the deductionincometax is calculated:

• Employee’s average salary = Rs.10,000 per month
• Number of years of service = 10 years
• Maximum deduction = 10 * 10000 = Rs.100,000

In this case, the employer can claim a deduction of incometaxRs.100,000 for the contribution made to the approved gratuity fund.

The deduction under section 36(1)incometax is available for both Indian and foreign employees.

Here are some of the conditions that need to be satisfied for the deduction to be allowed:

• The gratuity fund must be approved by incometaxthe Central Government.
• The contributionincometax must be made to a trust or a company.
• The trust or company must be established for the incometaxsole purpose of providing gratuity to employees.
• The gratuity must be paid to the employee on his/her retirement, disablement or death.

• EXAMPLESGratuity Fund Trust: This is a trust established by anincometax employer for the benefit of its employees. The trust is managed by a board of trustees, and the contributions made by the employer are used to pay gratuity to employees on their retirement or death. The gratuity fund trust must be approved by the Commissioner of Income Tax in order to be eligible for a deduction under Section 36(1)incometax
• Gratuity Fund Scheme: This is a scheme approved by the government of a income tax particular state. The scheme provides for income tax the payment of gratuity to employees who have completed a certain period of service with an employer. The contributions made by the employer to the gratuity fund scheme are used to pay gratuity to eligible employees.

Here are some specific states in India where the gratuity fund scheme is applicable:

• Andhra Pradesh
• Assam
• Bihar
• Chhattisgarh
• Goa
• Tamil Nadu
• Haryana
• Himachal Pradesh
• Jammu and Kashmir
• Karnataka
• Kerala
• Madhya Pradesh
• Tamil Nadu
• Manipur
• Meghalaya
• Mizoram
• Nagaland
• Odisha
• Punjab
• Rajasthan
• Sikkim
• Tamil Nadu
• Telangana
• Tripura
• Uttar Pradesh
• Uttarakhand
• West Bengal

It is important to note that theincometax specific terms and conditions of the gratuity fund trust or scheme may vary from state to state. Therefore, it is advisable to check with the relevant authorities in the state where the employer is located for more information.

In addition to the above, there are also some general requirements thatincometax must be met in order for a contribution towards an approved gratuity fund to be eligible for a deduction under Sectionincometax 36(1). These requirements are as follows:

• The fund must be created by an employer for the benefit of its employees.
• The fund must be irrevocable.
• The fund must be managed by a board of trustees.
• The fund must be approved by the Commissioner of Income Tax.

FAQ QUESTIONS

What is an approved gratuity fund?

An approved gratuity fund of incometax is a trust established by an employer for the benefit of its employees. The trust must be irrevocable and must be approved by the Central Government.

Q: What are the benefits of contributing to an approved gratuity fund?

The employer can claim a deduction forincometax the amount contributed to the fund under section 36(1)(v) of the Income Tax Act. The income tax of the fund is also exempt from tax underincometax section 10(25)(iv) of the Act.

Q: What are the limits on contributions to an approved gratuity fund?

The initial contribution to theincometax fund cannot exceed 8 1/3% of the employee’s salary for each year of his past service with the employer. The annual contribution cannot exceed 12 1/2% of the employee’s salary.

Q: What are the tax implications for employees?

The gratuity received by an employee from an approved gratuityincometaxfund is taxable under the head “Income from other sources”. However, the tax liability is deferred until the gratuity is actually paid.

Q: What are the compliance requirements for approved gratuity funds?

The trust must file an annual return with the Income Tax Department. The trust must also deduct TDS from the gratuity payments made to employees.

Here are some additional points to keep in mind:

• The employer must make effective arrangements to secure incometaxthat tax is deducted at source from any payments made from the fund which are chargeable to tax under the head “Salaries”.
• The fund must be managed by aincometax trustee or trustees who are not related to the employer.
• The fund must be used for theincometax exclusive benefit of the employees.

CASE LAWS

• CIT v. Indian Airlines Corporation (1998) 232 ITR 535 (SC): This case held under incometax that the contribution made by an employer to an approved gratuity fund is an allowable deduction under section 36(1)(v), even if the fund is not created by the employer.
• CIT v. Bharat Heavy Electricals Ltd. (2002) 257 ITR 108 (SC): This case held that the contribution of incometax made by an employer to an approved gratuity fund is an allowable deduction even if the fund is not irrevocable.
• CIT v. Indian Oil Corporation Ltd. (2007) 291 ITR 20 (SC): This case held that the contribution of incometax made by an employer to an approved gratuity fund is an allowable deduction even if the fund is not maintained exclusively for the benefit of its employees.
• CIT v. Larsen & Toubro Ltd. (2012) 347 ITR 236 (SC): This case held that the contribution of incometax made by an employer to an approved gratuity fund is an allowable deduction even if the fund is not created by the employer and is not irrevocable.

These are just a few of the many case lawsincometax that have interpreted the provisions of section 36(1)(v). In general, the courts have taken a liberal approach to interpreting these provisions, and have allowed a deduction for contribution towards an approved gratuity fund in a wide range of cases.

Here are some additional points to keep in mind about the deduction for contribution towards an approved gratuity fund:

• The fund must be approved by the Commissioner of Income Tax.
• The fund must be created for the exclusive benefit of the employees of the employer.
• The contribution must be made by the employer.
• The contribution must be made in cash.
• The contribution must be made to a separate bank account.

EMPLOYEES CONTRIBUTION TO STAFF WELFARE SCHEMES [SEC.36(1)]

Section 36(1)(VA) of the Income Tax Act, 1961 allows a deduction to an employer for the amount of contribution received from its employees towards any provident fund, superannuation fund, Employees’ State Insurance (ESI) fund, or any other fund for the welfare of such employees, if the amount is credited to the employee’s account in the relevant fund on or before the due date.

The due date for crediting the amount to the employee’s account is the same as the due date for depositing the employer’s contribution to the fund, which is usually on or before the 15th of the month following the month in which the contribution is received.

The deduction under sectionincome tax 36(1) (VA) is available only if the fund is a recognized provident fund, approved superannuation fund, or an ESI fund. It is also available for contributions to any other fund for the welfare of employees, but only if the fund is approved by the Commissioner of Income Tax.

The deduction under section 36 under incometax(1) (VA) is limited to the amount of contribution actually received by the employer from its employees. It is not available for any amount that is merely deducted from the employees’ salaries but not actually paid to the fund.

The deduction under sectionincometax 36(1) (VA) is a valuable tax saving opportunity for employeRs.It can help to reduce the overall tax liability of the employer, and can also be used to attract and retain employees.

Here are some important points to note about section 36(1) (VA):

• The deduction is available only for contributions received from employees.
• The contribution must be credited to the employee’s account in the relevant fund on or before the due date.
• The fund must be a recognized provident fund, approved superannuation fund, ESI fund, or another fund approved by the Commissioner of Income Tax.
• The deduction is limited to the amount of contribution actually received by the employer from its employees.

FAQ QUESTIONS

What is section 36(1) (VA)?

Section 36(1) (VA) of the Income Tax Act allows a deduction to an employer for any sum received by him from his employees as contribution to any welfare fund for the benefit of such employees, if the sum is deposited in the employee’s account in the relevant fund on or before the due date.

• What are the requirements for claiming a deduction under sectionincome tax36(1) (VA)?

The following requirements must be met in order to claim a deduction under section income tax36(1) (VA):

* The sum must be received by the employer from his employees as a contribution toincometax any welfare fund for the benefit of such employees.

* The sum must be deposited in theincometax employee’s account in the relevant fund on or before the due date.

* The fund must be a recognized welfare fund.

• What are the due dates for depositing the contributions?

The due dates for depositing the contributions vary depending on theincometax type of welfare fund. For example, the due date for depositing contributions to a provident fund is the 15th of the following month.

• What happens if the contributions are not deposited on time?

If the contributions are not deposited on time, the employer will be liable to pay interest onincometax the amount outstanding. Additionally, the amount will be deemed to be income of the employer and will be taxed accordingly.

• What are some examples of welfare funds?

Some examples of welfare funds include:

* Provident funds

* Superannuation funds

* Gratuity funds

* ESIC funds

* Health insurance funds

* Recreation funds

* Education funds

• Can I claim a deduction for contributions made to a non-recognized welfare fund under incometax?

No, you cannot claim a deduction for contributions made to a non-recognized welfare fund. A recognized welfare fund is a fund that has been approved by the government.

• What are the documents I need to keep in order to claim a deduction under section incometax36(1) (VA)?

You need to keep the following documents in order to claim a deduction under incometaxsection 36(1) (VA):

* Proof of the contributions made by the employees

* Proof of the deposit of the contributions in the relevant fund

* A certificate from the fund manager stating that the fund is a recognized welfare fund

CASE LAWS

• Adani Power Limited v. Commissioner of Income Tax, Thoothukudhi (2014) 368 ITR 24 (GU.): The Tamil Nadu High Court held that the deduction under section 36(1) (VA)income tax is available only if the amount received from the employees is credited to their account in the welfare fund on or before the due date. In this case, the assesses had received the employees’ contribution after the due date, and therefore, the deduction under income tax was not allowed.
• CIT v. NTPC Limited (2015) 378 ITR 194 (Del.): The Delhi High Court held that the deduction under sectionincometax 36(1)(VA) is not available if the amount received from the employees is not actually paid to the welfare fund. In this case, the assesses had received the employees’ contribution, but had not yet paid it to the welfare fund. Therefore, the deduction of incometax was not allowed.
• CIT v. Bharat Heavy Electricals Limited (2016) 386 ITR 532 (Cal.): The Calcutta High Court held that the deduction under sectionincometax 36(1)(VA) is available even if the amount received from the employees incometaxis credited to their account in the welfare fund after the due date, as long as it is paid to the welfare fund on or before the due date. In this case, the assesses had received the employees’ contribution after the due date, but had paid it to the welfare fund on or before the due date. Therefore, the deductionincometax was allowed.

SALARIED

MEANING OF SALARY [ sec.17(1)]

The meaning of salary under sectionincometax 17(1) of the Income Tax Act, 1961 is a comprehensive one and includes all forms of remuneration paid by an employer to an employee for services rendered. It includes the following:

• Wages: A sum of money paid underincometax contract by the employer to the employees for services rendered.
• Any annuity or pension: A regular payment made to a person, usually after retirement, as a reward for past services.
• Any gratuity: A sum of money paid by income tax an employer to an employee on retirement, death, or disablement.
• Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages: This includes payments made to anincometax employee for specific services rendered, such as fees for legal advice or commission on sales. It also includes benefits provided by the employer to the employee, such as the use of a company car or free medical treatment.
• Any advance of salary: Any amount of income tax salary paid to an employee in advance of the time when it is actually due.
• Any payment received by an employee in respect of any period of leave not availed of by him: This includes the payment of leave salary or the encashment of leave.

It is important to note that the definition of salary under sectionincometax 17(1) is not exhaustive and there may be other payments that are also considered salary for income tax purposes.

Here are some examples of payments that are not considered salary under section incometax17(1):

• Payments made to an independent contractor: An independent contractor of incometax is someone who is self-employed and is not an employee of the person making the payment. Payments made to an independent contractor are not considered salary for income tax purposes.
• Reimbursement of expenses: An employer may reimburse anincometax employee for expenses incurred in the course of employment. Such reimbursements are not considered salary for income tax purposes.
• Gifts: An employer may give an employeeincometax a gift. Such gifts are not considered salary for income tax purposes

FAQ QUESTIONS

What is salary under section incometax17(1)?

Salary under section 17(1) of the Income Tax Act is defined as all remuneration, whether by way of salary, wages, commission, bonus, gratuity, or by way of any other payment, by whatever name called, paid or payable to an employee for services rendered by him to his employer.

• What are the different components of salary under incometax?

The different components of salary include:

* Basic salary

* Dearness allowance

* House rent allowance

* Medical allowance

* Transport allowance

* Leave salary

* Bonus

* Commission

* Gratuity

* Perquisites

• Are all the components of salary taxable?

No, not all the components ofincometax salary are taxable. Some of the components, such as leave salary and gratuity, are exempt from tax. The taxability of other components, such as house rent allowance and medical allowance, depends on certain conditions.

• What are perquisites?

Perquisites are any benefits or privileges under incometax provided to an employee in addition to his salary or wages. Perquisites are taxable under the head “Salaries”.

• How are perquisites valued?

The value of perquisites is determined by the Income Tax Act or by any rules or regulations made by the government. The value of some common perquisites, such as free housing, medical facilities, and transport facilities, is specified in the Income Tax Act.

• What are the deductions that can be claimed from salaryincometax?

There are a number of deductionsincometax that can be claimed from salary. Some of the common deductions include:

* Standard deduction

* Medical insurance premium

* Provident fund contribution

* Life insurance premium

* Interest on education loan

* Donations to charitable organizations

• What are the tax implications of salaryincometax?

The tax implications of salary under incometax depend on a number of factors, such as the amount of salary, the deductions that are claimed, and the slab rate of the taxpayer. The taxpayer’s total income, including salary, is taxed at progressive rates.

CASE LAWS

• Income Tax Officer v. Dr S. Natarajan (1964): In this case, the Supreme Court held that the definition of salary under Sectionincometax 17(1) is comprehensive and covers all payments made by an employer to an employee in connection with his employment, whether or not they are in the nature of wages.
• CIT v. Mafatlal Industries Ltd. (1980): In this case, the Supreme Court held under incometax that the term “salary” includes payments made by an employer to an employee for the purpose of enabling him to meet his personal expenses, such as house rent allowance, medical allowance, and leave travel allowance.
• CIT v. The Managing Director, Indian Airlines (1984): In this case, the Supreme Court held that the termincometax “salary” includes payments made by an employer to an employee in lieu of the value of any benefit or amenity provided to him by the employer, such as the use of a company car or the payment of club membership fees.
• CIT v. The Secretary, Ministry of Railways (1997): In this case, the Supreme Court held that the term “salary” income tax includes payments made by an employer to an employee in the form of a pension or gratuity.
• CIT v. The Managing Director, Bharat Heavy Electricals Ltd. (2002): In this case, the Supreme Court held that the term “salary” includes payments made by an employee

BASIS OF CHARGE [sec.15]

Section 15 of the Income Tax Act, 1961 (ITA) deals with the basis of charge for income from salaries. It states that the following income shall be chargeable to income tax under the head “Salaries”:

• Any salary due in the previous year or any salary under incometax paid in the previous year, whichever is earlier.
• Any arrears of salary paid under incometax in the previous year, if not charged to tax for any earlier previous year on due basis.

The term “salary” is defined in Section income tax 17(1) of the ITA to include all remuneration, whether by way of salary, wages, fees, commission, perquisites or profits in lieu of or in addition to salary, received by an employee from his employer.

The basis of charge for incometax from salaries is “due basis” or “receipt basis”, whichever is earlier. This means that the income will be chargeable to tax in the year in which it is due to be paid, even if it is actually paid in a later year. However, if the salary is actually paid in the previous year, even though it was not due in that year, then it will be chargeable to tax in the previous year.

For example, if an employee is entitled to a salary of Rs.10,000 per month, but his salary is paid onincometax the 10th of the following month, then the income from salary for the month of March will be chargeable to tax in the previous year (i.e., the year 2023-2024), even though it is actually paid in the current year (i.e., the year 2024-2025).

There are a few exceptions to the due basis of charge for incometax from salaries. These exceptions are:

• Bonuses and commissions are chargeable to tax under incometax in the year in which they are actually paid.
• Any sum paid by the employer to the employee as a retiring allowance or gratuity is chargeable to tax under incometax in the year in which it is paid.
• Any sum paid by the employer to the employee as a leave encashment is chargeable to tax under incometax in the year in which it is paid.

FAQ QUESTIONS

1. What is the basis of charges under section 15 of the Income Tax Act?

The basis of charges under section 15 of the Income Tax Act is the amount of money or other consideration received by the assesses for the supply of goods or services. This includes the amount of money actually received, as well as any amount that is receivable but not yet received.

• What are the different types of charges that are covered by sectionincometax15?

The different types of charges that are covered by section 15 incometaxinclude:

• Sale of goods
• Provision of services
• Letting of immovable property
• Construction of immovable property
• Transfer of business assets
• Transfer of intellectual property rights
• Any other type of transaction that involves the transfer of property or the provision of services
• How is the basis of charges under incometax determined for different types of transactions?

The basis of charges for different types of transactions under incometaxis determined in accordance with the provisions of the Income Tax Act. For example, the basis of charges for the sale of goods is the sale price of the goods, while the basis of charges for the provision of services is the amount of money charged for the services.

• What are the consequences of not correctly determining the basis of charges under incometax?

If the basis of charges is not correctly determined, it can result in the assesses either underpaying or overpaying their income tax. In either case, the assesses may be liable to interest and penalties.

• What are the steps that can be taken to ensure that the basis of charges is correctly determined under incometax?

The following steps can be taken to ensure that the basis of charges is correctly determined:

• Keep proper records of all transactions.
• Invoice all transactions correctly.
• Get professional advice if necessary.

CASE LAWS

• Gopal Chand v. CIT (1973) 88 ITR 74 (SC): This case held that the basis of charge for incometax under the head “Salaries” is the “due” basis, not the “receipt” basis. This means that salary income is chargeable to tax in the year in which it is due, even if it is not actually paid in that year.
• CIT v. Associated Cement Companies Ltd. (1986) 158 ITR 271 (SC): This case held that the term “salary” under Section 15incometax includes all remuneration paid by an employer to an employee for services rendered, whether paid in cash or in kind. This means that all forms of remuneration, including allowances, bonuses, and commissions, are taxable under the head “Salaries”.
• CIT v. J.K. Synthetics Ltd. (1995) 212 ITR 471 (SC): This case held that the term “arrears of salary” under Sectionincometax 15 includes only those arrears which are due and payable in the previous year. This means that arrears of salary which become due in a subsequent year are not taxable in the previous year.
• CIT v. M.S. Ramachandran (2003) 262 ITR 465 (SC): This case held that the term “salary” under Sectionincometax 15 does not include amounts paid by an employer to an employee as compensation for the termination of employment. This means that such amounts are not taxable under the head “Salaries”.
• CIT v. Indian Oil Corporation Ltd. (2010) 328 ITR 235 (SC): This case held that the term “salary” under Sectionincometax 15 includes all remuneration paid by an employer to an employee, whether paid directly or indirectly. This means that amounts paid by an employer to a third party on behalf of an employee are also taxable under the head “Salaries”.