Question 2 OR (c)

Tax treatment of an unrecognised provident fund (as set, 1961 Act, AY 2019-20)

3 marks

Time to write: About 6 minutes

From an older CBCS paper

Question

Question 2 OR (c) · 3 marks

Explain the tax treatment of unrecognised provident fund. 3

Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2019-20 (previous year 2018-19), with the dates as printed.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

6 minfor 3 marks

Read from the question

ExplainEach point stated, then explained in a line or two.

Write it in this order

1 Treatment each year: contributions and interest 1 mark 2 min
2 Treatment on payment: the four parts 1½ marks 3 min
3 Example ½ mark 1 min

123

Short on time? Step 2 carries 1½ of the 3 marks: guard its minutes.

Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

What an unrecognised provident fund is

A provident fund set up by an employer and his employees that has not been recognised by the Commissioner under Part A of the Fourth Schedule is an unrecognised provident fund. It gets none of the concessions of a recognised fund.

During the employment

Employer's contribution: not taxed in the employee's hands in the year it is credited.
Interest credited: not taxed in the year it is credited, whether on the employer's or the employee's part.
Employee's own contribution: no deduction under section 80C. Section 80C(2) allows contributions to a recognised provident fund (clause (vi)) and to a fund under the Provident Funds Act, 1925 (clause (iv)), but not to an unrecognised fund.

When the balance is paid out

On retirement or on leaving, the accumulated balance is split into its parts:

Part of the balance	Treatment
Employer's contributions and the interest on them	Salary of the year of receipt: profits in lieu of salary (section 17(3)(ii))
The employee's own contributions	Not taxable: it is his own money, already taxed as salary
Interest on the employee's own contributions	Income from other sources of the year of receipt

Section 17(3)(ii) treats a payment from a provident or other fund as profits in lieu of salary except to the extent it consists of the assessee's own contributions or the interest on them; that interest, not being salary, falls under the residuary head (section 56(1)). Since the employer's share is taxed all at once, the employee may claim relief under section 89 for receiving several years' salary in one year.

Example (our own figures)

On retiring in 2018-19 an employee receives ₹9,00,000 from an unrecognised fund: employer's contributions ₹3,00,000 and interest on them ₹1,50,000; his own contributions ₹3,00,000 and interest on them ₹1,50,000. Salary includes ₹4,50,000; ₹1,50,000 is income from other sources; ₹3,00,000 is not taxed.

Where the 3 marks sit

#	Component	Marks
1	Treatment each year: contributions and interest	1
2	Treatment on payment: the four parts	1.5
3	Example	0.5
	Total	3

Keyboard: ← → previous and next question, / search

Report a problemopens an email to admin@getkunji.com with the question ID7024-Q2cORalready filled in.