Tax on accumulated balance of recognised provident fund.

191

Where the accumulated balance due to an employee participating in a recognised provident fund is included in his total income, owing to the provisions of paragraph 8 of Part A of Schedule XI not being applicable, the Assessing Officer shall calculate the total of the various sums of tax as per the provisions of paragraph 9 thereof.

Explanation

Section Summary:

Section 191 of the Income Tax Act deals with the taxation of the accumulated balance in a recognised provident fund (RPF) when it is included in an employee's total income. This typically happens when the conditions specified in Paragraph 8 of Part A of Schedule XI are not met. In such cases, the Assessing Officer is required to calculate the tax liability on the accumulated balance based on the rules outlined in Paragraph 9 of Part A of Schedule XI.

Key Changes:

• This section clarifies the process for taxing the accumulated balance of a recognised provident fund when it is not exempt under Paragraph 8 of Part A of Schedule XI.
• It ensures that the tax calculation is done systematically by the Assessing Officer, following the provisions of Paragraph 9.

Practical Implications:

• For Employees: If the conditions for tax exemption (under Paragraph 8) are not satisfied, the accumulated balance in the RPF becomes taxable. This could result in a higher tax liability for the employee at the time of withdrawal.
• For Employers: Employers must ensure that the provident fund is maintained as per the rules to avoid triggering tax liability for employees.
• For Assessing Officers: They are required to calculate the tax on the accumulated balance using the method prescribed in Paragraph 9.

Critical Concepts:

1. Recognised Provident Fund (RPF): A provident fund that is approved by the Commissioner of Income Tax and meets specific conditions under the Income Tax Act.
2. Paragraph 8 of Part A of Schedule XI: This paragraph outlines the conditions under which the accumulated balance in an RPF is exempt from tax. If these conditions are not met, the balance becomes taxable.
3. Paragraph 9 of Part A of Schedule XI: This provides the method for calculating the tax on the accumulated balance when it is not exempt.

Compliance Steps:

1. For Employees: Ensure that the conditions for tax exemption under Paragraph 8 are met (e.g., minimum service period, reasons for withdrawal).
2. For Employers: Maintain proper records and ensure compliance with RPF rules to avoid triggering tax liability for employees.
3. For Assessing Officers: Follow the calculation method in Paragraph 9 to determine the tax on the accumulated balance.

Example:

• Scenario: An employee withdraws the accumulated balance from their RPF after 4 years of service (less than the 5-year minimum required for exemption under Paragraph 8). The Assessing Officer calculates the tax on the withdrawn amount using the method in Paragraph 9.
• Outcome: The employee pays tax on the accumulated balance, which is added to their total income for the year.

This section ensures clarity in taxing RPF balances when exemptions do not apply, providing a structured approach for tax calculation.