Once the salary is actually received, the employer's contribution to NPS is also treated as received, even if it is not deposited into the NPS account.
Salary is taxable on a due basis or receipt basis.
The media organisation where Rajesh Kumar (name changed) has been working for the last 12 years is in deep financial trouble, resulting in delay in salary payments by 11 months. The delay in salary payments had started in the year 2017, first by some days, then a month and now has gone up to almost a year.
“We are yet to get the salary of January 2020 and don’t know if full salary will be paid or half,” said Rajesh.
“We have not got the Form 16 of Assessment Year (AY) 2020-21 (Financial Year 2019-20) yet, but have got salary slips of all the months,” he added.
The company has acted cleverly and without paying salary, it has issued all the salary slips till date after deducting PF (Provident Fund) contributions, professional tax and income tax, where applicable.
Now Rajest wonders, if he has to show even the part of salary which he has not got yet in his Income Tax Return (ITR) for AY 2020-21 on the basis of salary slips, as the due date of filing return will end on December 31, 2020, if not extended further.
The Form 16 of AY 2019-20 (FY 2018-19) reveals that the tax was calculated on a due basis as it contains salary starting from the month of April 2018 to March 2019, which was payable in April 2019.
So, he has to show the entire salary of FY 2019-20 in his ITR of AY 2020-21 even though he has not got it all.
On the other hand, Sanju Kumar (name changed), who works as a teacher in a government school in UP, finds that the employer’s contributions of 14 per cent of the salary have not been deposited in his NPS (National Pension System) account, while the employee’s contribution has been deducted from his salary.
As the employer’s contribution to NPS over 10 percent of salary is taxable for state government employees, Sanju wonders if he has to include the taxable part of the contribution in his ITR or not.
The Form 16 of Sanju reveals that the tax is calculated on salary starting from the month of March 2019, which he has received in April 2019, to February 2020, which he has received in March 2020.
As the tax is calculated and revealed in the Form 16 of Sanju is on receipt basis, he is supposed to include only that part of the earnings, which he has actually received.
So, if any part of his salary and/or allowance is not received, Sanju is not supposed to include it in his ITR.
However, the employer’s contribution to NPS is not paid to an employee directly, but is deposited to the NPS account of the employee. Moreover, the contribution is part of the salary package and can’t be accounted for separately.
So, once the salary is actually received, the employer’s contribution to NPS is also treated as received, even if it is not deposited into the NPS account. Hence, it has to be included in ITR irrespective of the fact that it is actually received or is due.
“Salary is taxable on a due basis or receipt basis, whichever is earlier in accordance with the charging section 15 of the Income Tax Act. Any contribution by the employer to the employee’s pension account forms a part of salary in the hands of the employee. If the employer’s contribution to NPS (i.e. over the tax free contribution of 10 per cent) is as per the compensation plan (i.e. employment terms) agreed between the employer and employee, then in such cases, even if the NPS is not deposited, it shall form part of salary on due basis,” said Dr. Suresh Surana, Founder, RSM India.