The proposal is to provide a combined upper limit of Rs 7.5 lakh in respect of employer's contribution in a year to NPS, superannuation fund and recognised provident fund.
Budget 2020-21: The FM in her Budget 2020 speech has proposed for rationalization of tax treatment of employer’s contribution to recognized provident funds, superannuation funds and national pension scheme. This could turn into a piece of bad news for Central Government Employees, Private Sector workers with big pay cheques if they are earning a high salary.
The proposal is to provide a combined upper limit of Rs 7.5 lakh 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.
Under the existing provisions of the Act, the contribution by the employer to the account of an employee in a recognized provident fund exceeding 12 per cent of salary is taxable. Further, the amount of any contribution to an approved superannuation fund by the employer exceeding one lakh fifty thousand rupees is treated as perquisite in the hands of the employee. Similarly, the assessee is allowed a deduction under National Pension Scheme (NPS) for the 14 per cent of the salary contributed by the Central Government and 10 per cent of the salary contributed by any other employer.
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However, there is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer. This is giving undue benefit to employees earning a high salary income. While an employee with low salary income is not able to let employer contribute a large part of his salary to all these three funds, employees with high salary income are able to design their salary package in a manner where a large part of their salary is paid by the employer in these three funds.
Thus, this portion of salary does not suffer taxation at any point of time, since Exempt-Exempt-Exempt (EEE) regime is followed for these three funds. Thus, according to the government, not having a combined upper cap is iniquitous and hence, not desirable.