Ambiguity Inserted By Finance Act 2020 In Taxation Of Employer’s Contribution In National Pension Scheme (NPS)

CA Sanjay Mody has pointed out that the result of the amendment made by the Finance Act 2020 to section 17(2)(vii) of the Income-tax Act is that the contributions made by the employer in NPS account of the employee, after being included as ‘Salary’ in the hands of the employee, may also be included as ‘Perquisite’ in computing his or her taxable salary income, resulting in double taxation. He has urged the Government to rectify the ambiguity as it will otherwise lead to litigation and also frustrate the social objective of the NPS

Employer’s contribution in NPS (National Pension Scheme) account of the employee is includible in the taxable income of an employee-assessee as ‘salary’and even thereafter, by the Finance Act, 2020, an amendment has been made in the definition of ‘perquisite’ so as to include such contribution therein also in certain circumstances. Therefore, the said amendment is apparently capable of leading to double taxation in the hands of employee-assessee of very same amountof employer’s contribution to his NPS account first, as salary and then again as perquisite.

To elaborate, for the purposes of computing income under the head ‘Salaries’ under sections 15 and 16 of the Income-tax Act, 1961 (the Act), the word ‘Salary’ is defined in section 17(1) of the Act and ‘Perquisite’ is defined under section 17(2) of the Act. For the purposes of the present discussion relevant provisionsas contained in Section 17(1)(viii) of the Act and section 17(2)(vii) of the Act (as amended by the Finance Act, 2020 w.e.f. 01.04.2021)are reproduced as under:-

“17. For the purposes of sections 15 and 16 and of this section,—
(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;”

(2) “perquisite” includes—
       (i)…..
      …….
(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer––
(a) in a recognised provident fund;
(b) in the scheme referred to in sub-section (1) of section 80CCD; and
(c)  in an approved  superannuation fund,
to the extent it exceeds seven lakh and fifty thousand rupees in a previous year;”

National Pension Scheme (NPS) being one of the pension scheme referred to in section 80CCD of the Act, contribution made by the employer in account of an employee under such scheme is included in the definition of salary in view of provisions of section 17(1)(viii) of the Act and is assessed as such in the hands of employee-assessee. After such inclusion in ‘salary income’ and consequently in gross total income, certain deduction is permissible in respect of such amount of employer’s contribution in NPS as specified in section 80CCD(2) of the Act. The deduction permissible under section 80CCD(2) of the Act may not be of the entire amount of employer’s contribution because the deduction is limited to certain percentage of basic salary and dearness allowance of the relevant year. The said limit is 14% when the contribution is made by the Central Government and 10% when the contribution is made by State Government or any other employer. The employer’s contribution to NPS in excess of the said limit is taxable and also not deductible. In addition to this, the recently enacted Finance Act, 2020(which received assent of the President on 27.03.2020) by way of an amendment to sub-clause (vii) of clause (2) of section 17 of the Act included the very same amount of employer’s contribution in NPS account of the employee in the definition of ‘Perquisite’ also in certain circumstances.

As a consequence to the above amendment, with effect from the Assessment Year 2021-22, the amount of contributions made by the employer in NPS account of the employee after being included as ‘Salary’ in the hands of the employee may also be included as ‘Perquisite’ in computing taxable salary income of an assessee, resulting in inclusion of the very same amount of contribution twice in the hands of very same employee assessee, once as salary and then again as perquisite.

Let us understand the above, with the help of an example. Say, in case of Non-Central Government employee having annual basic salary and dearness allowance of Rs. 50 lakh, his employer contributes Rs. 20 lakh in his NPS account during the previous year relevant to the Assessment Year 2021-22. In such a scenario, Rs. 20 lakh is to be included in his income as Salary under section 17(1)(viii) and then again Rs. 12.50 lakh (being in excess of Rs. 7.50 lakh) is to be included in his income as Perquisite under section 17(2)(vii) and permissible deduction under section 80CCD(2) works out to Rs. 5 lakh being 10% of salary and dearness allowance. As a result, his income under the head ‘salary’ and consequently ‘gross total income’ will increase by Rs. 32.50 lakh (Rs. 20 lakh and Rs. 12.50 lakh) and after deduction of Rs. 5 lakh under section 80CCD(2) of the Act, his total taxable income will increase by Rs. 27.50 lakh for the amount of Rs. 20 lakh contributed in his NPS account by his employer. Thus, it establishes that the amendment made by the Finance Act, 2020 in section 17(2)(vii) of the Act is capable of resulting, on a plain reading, in double taxation of the very same amount in certain circumstances.

The issue which creeps up is that whether double taxation is legally permissible in India?

In this regard the settled position of law is that double taxation is not prohibited as such provided the Legislature has expressly provided for it. In this connection, the Hon’ble Supreme Court in the case of Laxmipat Singhania v. CIT (1969) 72 ITR 291 at page 294 has held that, “It is a fundamental rule of law of taxation that, unless otherwise expressly provided, income cannot be taxed twice.”

Further, the Hon’ble Supreme Court again in the case of Jain Brothers v. Union of India (1970) 77 ITR 107 (SC) has held as under:-

“It is not disputed that there can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the subject twice over to the same tax…..If any double taxation is involved, the Legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that subject cannot be taxed twice over.”

Recently, the Hon’ble Supreme Court in the case of Mahaveer Kumar Jain v. CIT (2018) 404 ITR 738 (SC) has held as under:-

“Furthermore, a taxing statute should not be interpreted in such a manner that its effect will be to cast a burden twice over for the payment of tax on the taxpayer unless the language of the Statute is so compelling that the court has no alternative than to accept it. In a case of reasonable doubt, the construction most beneficial to the taxpayer is to be adopted.”

In the backdrop of the above well settled position of law, it is to be seen whether there is any specific provision in the Act for including employer’s contribution in NPS twice in the income of the employee assessee for levying income-tax. Though the said employer’s contribution in NPS is included in the definition of  ‘salary’ under section 17(1) and also included in the definition of ‘perquisite’ under section 17(2) but the same in itself cannot be construed as a provision which specifically provides for double taxation of the said amount of employer’s contribution.

Further, a perusal of memorandum to the Finance Bill, 2020 shows that intention for enacting substituted section 17(2)(vii) was only to bring to tax that part of the contribution made by employer to the NPS account of the employee which was exempt from tax and that too only when such contribution exceeds the specified limit of Rs. 7.50 lakh along with contribution to other two specified funds. The relevant part of the said memorandum is extracted as under:-

“Under the existing provisions of the Act, the contribution by the employer to the account of an employee in a recognized provident fund exceeding twelve 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 fourteen per cent of the salary contributed by the Central Government and ten per cent of the salary contributed by any other employer. 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….”

The employer’s contribution to the NPS account of employee is not an exempt incomeper se. It is including in gross total income of the employee as salary and after that deduction as per the limit specified in section 80CCD(2) of the Act is permissible. The contrary observation made in the memorandum to this extent seems to be not correct.

Be that as it may, in view of the above discussed legal position, in absence of any specific provision in the Act providing for double taxation of contribution made by the employer in the NPS account of employee-assessee, on a reasonable construction of the provisions of sections 17(1)(viii) and 17(2)(vii) of the Act, double taxation is required to be avoided.

The issue, therefore, is how to avoid this double taxation. To avoid double taxation, the amount of contribution made by employer in the NPS account of employee, can be included in total income of such an employee either as salary under section 17(1)(viii) or as perquisite under section 17(2)(vii). Since both are legally permissible, one whichis more beneficial to the assessee is to be adopted and the same shall be at the option of the assessee. In such circumstances, the provisions of section 17(2)(vii) of the Act, that is to treat the employer’s contribution in NPS as perquisite will be more beneficial for the assessee and as such the assessee will opt for that. As a consequence of the same, unintended double benefit may also flow to the assessee in form of non-inclusion of amount of employer’s contribution in NPS to the extent of Rs. 7,50,000/- under section 17(2)(vii) in the gross total income of the employee assessee, but still deduction under section 80CCD(2) in respect of the very same amount being allowed to him. The above double benefit is possible as because the provisions of section 80CCD falls in part B of chapter VI-A of the Act. 

Notwithstanding above, the above position of law after enactment of Finance Act, 2020 in this respect may lead to avoidable litigations unless correction in law is made by the Legislature or suitable clarification is issued by the Central Board of Direct Taxes. The ambiguity inserted by the Finance Act, 2020 in the law will also discourage employees for opting for NPS where it is not mandatory in the fear of double taxation or unnecessary litigation and in turn, will defeat the social objective of the Government for which NPS has been framed by it.