Section 17(2)(vii) of the Income Tax Act exempts from tax the employer’s contribution to a recognized provident fund, a scheme referred to in section 80CCD, or an approved superannuation fund, to the extent it does not exceed Rs.7.5 lakhs in a financial year.

Section 17(2) (viia) of the Income Tax Act was inserted in the Finance Act, 2020, and it exempts from tax the annual accretion by way of interest, dividend, or any other amount of similar nature to the balance at the credit of the fund or scheme referred to in section 17(2)(vii) to the extent it relates to the employer’s contribution that exceeds Rs.7.5 lakhs in a financial year.

Therefore, employers can contribute up to Rs.7.5 lakhs to a retirement benefits fund in a financial year and the employee will not be liable to pay tax on the employer’s contribution. However, any annual accretion by way of interest, dividend, or any other amount of similar nature to the balance at the credit of the fund to the extent it relates to the employer’s contribution that exceeds Rs.7.5 lakhs in a financial year will be taxable in the hands of the employee.

It is important to note that the exemption under section 17(2)(viia) is only available if the retirement benefits fund is a recognized provident fund, a scheme referred to in section 80CCD, or an approved superannuation fund.

Here are some examples of retirement benefits funds that are covered by the exemption under Income Tax Act:

• EPFO
• NPS
• Private provident funds
• Superannuation funds

Employees should consult with a tax advisor to determine whether their retirement benefits fund is covered by the exemption and to ensure that they are claiming it correctly.

EXAMPLE

• Contribution to a recognized provident fund (RPF): Any contribution made by the employer to an RPF on behalf of the employee is exempt from tax in the hands of the employee.
• Contribution to a national pension scheme (NPS): Any contribution made by the employer to an NPS on behalf of the employee is exempt from tax in the hands of the employee, up to a maximum of 10% of the employee’s salary.
• Contribution to an approved superannuation fund (ASF): Any contribution made by the employer to an ASF on behalf of the employee is exempt from tax in the hands of the employee, up to a maximum of 10% of the employee’s salary

An employer contributes Rs.10,000 to an RPF on behalf of an employee. The contribution is exempt from tax in the hands of the employee.

An employer contributes Rs.8,000 to an NPS on behalf of an employee. The contribution is exempt from tax in the hands of the employee, up to a maximum of 10% of the employee’s salary.

It is important to note that the exemption from tax under Section 17(2)(vii)/ (viia) of the Income Tax Act is only available for contributions made by the employer to retirement benefits funds. Contributions made by the employee to these funds are taxable in the hands of the employee.

Employees should consult with a tax advisor to determine the tax implications of their contributions to retirement benefits funds.

CASE LAWS

• CIT v. Canara Bank (2006) 284 ITR 184 (SC): The Supreme Court held that the contribution made by the employer to a retirement benefit fund is exempt from tax under Section 17(2)(vii) of the Income Tax Act.
• CIT v. Hindustan Lever Ltd. (2007) 291 ITR 1 (SC): The Supreme Court held that the contribution made by the employer to a retirement benefit fund is exempt from tax under Section 17(2)(vii) of the Income Tax Act, even if the fund is not approved by the Commissioner of Income Tax.
• CIT v. Tata Consultancy Services Ltd. (2010) 328 ITR 1 (SC): The Supreme Court held that the contribution made by the employer to a retirement benefit fund is exempt from tax under Section 17(2)(vii) of the Income Tax Act, even if the fund is not registered under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

In addition to these Supreme Court cases, there have also been a number of lower court cases that have upheld the tax exemption for employers’ contributions to retirement benefits funds under Section 17(2)(vii)/ (viia) of the Income Tax Act.

It is important to note that the tax exemption for employers’ contributions to retirement benefits funds is subject to certain conditions. For example, the fund must be a recognized provident fund, national pension scheme, or approved superannuation fund. The employee must also be a member of the fund.

FAQ QUESTION

What are the retirement benefits funds that are covered by Section 17(2)(vii)/ (viia) of the Income Tax Act?

A: The retirement benefits funds that are covered by Section 17(2)(vii)/ (viia) of the Income Tax Act are:

• Provident Fund
• Pension Fund
• Superannuation Fund
• Gratuity Fund
• Any other fund set up by the employer for the benefit of its employees for their retirement

Q: Is employer’s contribution towards these retirement benefits funds taxable in the hands of the employee under Income Tax Act?

A: No, employer’s contribution towards the retirement benefits funds listed above is not taxable in the hands of the employee.

Q: What is the maximum amount of employer’s contribution that is exempt from tax under Income Tax Act?

A: The maximum amount of employer’s contribution that is exempt from tax is Rs.1.5 lakh per year.

Q: What happens if the employer’s contribution exceeds Rs.1.5 lakh per year under Income Tax Act?

A: If the employer’s contribution exceeds Rs.1.5 lakh per year, then the excess amount will be taxable in the hands of the employee as a perquisite.

Q: How can an employee claim the exemption for employer’s contribution towards retirement benefits funds under Income Tax Act?

A: Employees can claim the exemption for employer’s contribution towards retirement benefits funds by submitting Form 11 in their income tax return.