The Union Budget 2020 was presented by the Finance Minister, Nirmala Sitharaman on 1 February 2020, as her second budget. The recently enacted Finance Act, 2020 which received assent of the President on 27.03.2020, made the various amendments in the various sections and rules of Income Tax Act, 1961.

The definition of “perquisite” u/s 17(2) of the Income Tax Act, 1961(‘the Act’) was also amended which may lead to double taxation in the hands of employee of contribution made by the employer to National Pension Scheme (‘NPS’). This is noteworthy here that for computing income under the head ‘salaries’ under section 15, the contribution made by an employer towards NPS also gets taxed as salary as defined u/s 17(1) of the Act.

Let us understand how it may happen:
For computing income under the head of ‘salaries’ u/s 15 and 16 of the Income Tax Act, 1961, the word ‘Salary’ is defined u/s 17(1) and ‘Perquisite’ is defined u/s 17(2) of the Income Tax Act, 1961.

As per Section 17(1) ‘Salary’ includes—
(i) …

(viii) the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD;

as per amended section 17(2) which take effect from 1st day of April 2021 ‘Perquisite’ Includes- (i) …

(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer

• in a recognised provident fund;
• in the scheme referred to in sub-section (1) of section 80CCD; and
• in an approved superannuation fund,

 
to the extent it exceeds seven lakh and fifty thousand rupees in a previous year;

Hence, after detailed analysis of above-mentioned definitions, the employer contribution in National Pension Scheme is included in the taxable income of the employee that is assessee as ‘Salary’ and then again as ‘Perquisite’ due to amendment of definition by Finance Act, 2020.

However, such amount is included in taxable income of the assessee as ‘perquisite’, if contribution made by employer in a previous year to above mentioned fund exceeds seven lakh and fifty thousand rupees.

Also, the National Pension scheme is the scheme which is covered u/s 80CCD of the Act and included in the definition of the salary u/s 17(1)(viii) and taxable in the hands of employee-assessee.

The contribution gets added in the Gross total income and then the deduction of certain amount u/s 80CCD is allowed which doesn’t exceeds the 14% of basic salary and dearness allowance when the contribution is made by the Central Government and 10% of basic salary and dearness allowance when the contribution is made by State Government or any other employer. In addition to this, the said amount gets taxed in the ‘Perquisite’ due to recently amendment made in the definition of ‘Perquisite’ u/s 17(2)(vii) of the Act by Finance Act, 2020 as mentioned above.

Meaning thereby, due to such amendment it may led to double taxation on employer’s contribution to National Pension Scheme i.e. once in ‘salary’ and once in ‘perquisite’ of the very same amount in certain circumstances.

Let us understand the above-mentioned amendments by following example:

Mr. X is working as an employee in Z Pvt. Ltd company and received the following amount during the previous year:

Particular	Amount in Rs.
Basic Salary	50,00,000
Dearness Allowance	10,00,000
Employer’s Contribution to NPS	7,00,000
Employer’s Contribution to the recognized Superannuation Fund	10,00,000
Employer’s Contribution to recognized Provident Fund	8,00,000
Total	85,00,000

 
Income under head ‘salary’ can be Calculated as tabulated below:

Particular	Total Income As per Existing Law	Total Income As per amended Law
Basic salary [Section 17(1)]	50,00,000	50,00,000
Dearness Allowance [Section 17(1)]	10,00,000	10,00,000
Employer’s Contribution to NPS	7,00,000	7,00,000
Employer’s Contribution to the recognized Superannuation Fund in excess of Rs. 1.5 lakh as per old section 17(2)	8,50,000	–
Employer’s contribution to recognized provident fund (in excess of 12% of basic pay) [Rs. 8 lakh (less) Rs. 6 lakh (Rs. 50 lakh * 12%, taxable under section 17(1)]	2,00,000	2,00,000
Perquisites arising from employer’s aggregate contribution to superannuation fund and to NPS in excess of 7.5 Lakh as per amended section 17(2)	–	17,50,000*
Gross Total Income	77,50,000	86,50,000
Less: Standard Deduction	50,000	50,000
Less: Deduction U/s 80CCD [10% of (50,00,000+10,00,00)]	6,00,000	6,00,000
Total Income	71,00,000	80,00,000

 
Thus, from the above-mentioned example it can be clearly seen that the employer’s contribution to National Pension Scheme is taxed twice due to the amendment made in the definition of ‘perquisite’ u/s 17(2) by Finance Act, 2020.

In this regard, the settled position of law is that double taxation is not prohibited as such provided law has expressly provided for it and for this purpose it is to be check whether there is any specific provision in the Act for including employer’s contribution in National Pension Scheme twice in the taxable income of the employee assessee. Even so, employer’s contribution to National Pension Scheme is cover in definition of ‘salary’ u/s 17(1) and also included in definition of ‘perquisite’ u/s 17(2) but the same in itself cannot be interpreted as a provision which specifically mentioned for double taxation of the said amount of employer’s contribution.

Further, after study of Memorandum to the Finance Bill, 2020 the purpose of the amendment was to tax the employees with high salary package taking undue benefits. To elaborate the same the relevant part of the memorandum is extracted as under:-

“Under the existing provisions Act, the contribution by the employer to the account of an employee in a recognized provident fund by the employer is taxable if such contribution was exceeds 12% of salary. Further, contribution to approved superannuation fund is taxable if it exceeds one lakh fifty thousand in the previous year and it is treated as a perquisite given to employee. Similarly, assesssee is allowed to take deduction of amount contributed to National Pension Scheme by employer upto 14% of Basic salary and dearness allowance he is government employee and 10% if he is private employee. 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 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, not having a combined upper cap is iniquitous and hence, not desirable. Therefore, it is proposed to provide a combined upper limit of seven lakh and fifty thousand rupee in respect of the employer’s contribution in a year to NPS, superannuation fund and recognized provident fund and any excess contribution is proposed to be taxable….”
However as per the above mentioned “settled position of law is that double taxation is not prohibited as such provided law has expressly provided for it” but there is no specific provision for the same. So, double taxation on account of employer contribution to National Pension Scheme which is included in ‘salary’ u/s 17(1) and in ‘perquisite’ u/s 17(2) is required to be avoided.

So, to avoid the double taxation, employer contribution to National Pension Scheme can be included either as ‘salary’ u/s 17(1) or as ‘perquisite’ u/s 17(2). The employee-assessee can opt for such option which is more beneficial to him.

In spite of above, it may lead to avoidable litigation after the enactment of Finance Act, 2020 unless correction in law is made by the legislature or clarification for the same is issued by Central Board of Direct Taxes. Due to ambiguity inserted by the Finance Act, 2020 It may discourage the employees for opting National Pension Scheme because of fear of double taxation or to avoid unnecessary litigations. Hence it will defeat the objective of the government for which National Pension Scheme has been framed by it.

Written by
Mohit Garg
Articled Clerk