Income Tax Act

Official PDF pages 661–665

SOURCE PDF PAGE 661
( i )   of an establishment to which the provisions of section 1(3) of the
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
(19 of 1952) apply; or
( ii )   of an establishment notified by the Central Provident Fund Commis -
sioner under section 1(4) of the said Act,
and such establishment shall obtain exemption under section 17 of the
said Act from the operation of all or any of the provisions of any scheme
as referred to in that section; ]
( g )   the employer, subject to clause ( h ), shall not be entitled to recover any
sum from the fund, except when the employee—
( i )   is dismissed for misconduct; or
( ii )   voluntarily leaves his employment otherwise than due to ill-health
or other unavoidable cause before the end of the term of service
specified in the regulations of the fund;
( h )   for the purposes of clause ( g ), the recovery made by the employer shall
be limited to––
( i )   the contributions made by him to the individual account of the
employee;
( ii )   interest credited in respect of such contributions as per the regu -
lations of the fund; and
( iii )   the accumulations thereof;
( i )   the accumulated balance due to an employee shall be payable on the day
he ceases to be an employee of the employer maintaining the fund;
( j )   except as provided in clause ( i ) or as per conditions and restrictions
prescribed, no portion of the balance to the credit of an employee shall
be payable to him.
Relaxation of conditions.
5 . (1) Irrespective of anything contained in paragraph 4( a ), the approving authority
may, if he thinks fit and subject to such conditions that he thinks proper to attach
to such recognition, record recognition to a fund which is—
( a )   maintained by an employer whose principal place of business is outside
India; and
( b )   the proportion of employees employed outside India does not exceed
10%.
(2) Irrespective of anything contained in paragraph 4( b ), an employee who retains
his employment––
( a )   while serving in the armed forces of the Union; or
( b )   when taken into or employed in the national service under any law for
the time being in force,

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may, contribute to the fund during such service in the armed forces or employment
in the national service, a sum not exceeding the amount he would have contributed
had he continued to serve the employer, whether he received any salary or not from
the employer.
(3) Irrespective of anything contained in paragraph 4( e ) or ( i ),—
( a )   at the request made in writing by the employee who ceases to be an
employee of the employer maintaining the fund, the trustees of the fund
may agree to retain the whole or any part of the accumulated balance to
be drawn by him at any time on demand;
( b )   when the accumulated balance due to such employee is retained in the
fund as per clause ( a ), the fund may also include interest in respect of
such accumulated balance; and
( c )   the fund may also consist of any amount and interest thereof transferred
from the employee’s individual account in any recognised provident fund
maintained by his former employer.
(4)  
46
[ *** ]
(5) Irrespective of anything contained in paragraph 4( j ), in order to allow an
employee to pay the amount of tax assessed on his total income under paragraph
11(4), such employee shall be allowed to withdraw from the balance amount to his
credit in the recognised provident fund, a sum not exceeding the difference between
such amount and the amount to which he would have been assessed if the transferred
balance referred to in paragraph 11(2) had not been included in the total income.
47
[Employer’s annual contributions, when deemed to be income received by
employee.
6.   The portion of the annual accretion in the tax year to the balance of an employee
in a recognised provident fund consisting of interest credited on the balance to the
46.   Omitted by the Finance Act, 2026, w.e.f.   1-4-2026 . Prior to its omission, sub-paragraph (4)
read as under :
“(4) Subject to any rules made by the Board, the approving authority may relax the provisions
of paragraph 4( c ) for any particular fund,—
( a )   to permit the payment of larger contributions by an employer to the employee’s
individual account whose salary does not exceed five hundred rupees per month;
and
( b )   to permit the employers to credit the employees’ individual accounts with periodical
bonuses or contributions of a contingent nature, when the calculation and payment
of such bonuses or contributions is provided for on definite principles by the regu -
lations of the fund.”
47.   Substituted by the Finance Act, 2026, w.e.f.   1-4-2026 . Prior to its substitution, paragraph 6
read as under :
“6.   Employer’s annual contributions, when deemed to be income received by employee. —The
portion of the annual accretion in the tax year to the employee’s balance in a recognised
provident fund consisting of—
( a )   contributions made by the employer exceeding 12% of the employee’s salary; and
( b )   interest credited on the balance to the credit of an employee in so far as it is allowed
at a rate exceeding such rate as fixed by the Central Government by notification,
shall be deemed to have been received by the employee and included in his total income for
that tax year and shall be liable to income tax.”

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credit of an employee in so far as it is allowed at a rate exceeding such rate as fixed
by the Central Government by notification, shall be deemed to have been received by
the employee and included in his total income for that tax year and shall be liable to
income-tax. ]
Exemption for employee’s contributions.
7.   An employee participating in a recognised provident fund shall, in respect of his
own contributions to his individual account in the fund in the tax year, be entitled
to a deduction in the computation of his total income of an amount determined as
per section 123.
Exclusion from total income of accumulated balance
8.   (1) Subject to the provisions of sub-paragraph (2), the accumulated balance due
and payable to an employee shall be excluded from the computation of his total
income—
( a )   if the employee has rendered continuous service with his employer for
five years or more; or
( b )   even if, the employee has not served continuously, the service was ter -
minated due to––
( i )   the employee’s ill-health; or
( ii )   by the contraction or closure of the employer’s business; or
( iii )   other cause beyond the control of the employee;
( c )   if,   on   the   cessation   of   his   employment,   the   employee   obtains
employment with any other employer, to the extent the accumulated
balance due and becoming payable to him is transferred to his individ -
ual account in any recognised provident fund maintained by such other
employer; or
( d )   the entire balance standing to the employee’s credit is transferred to his
account under a pension scheme referred to in section 124 and notified
by the Central Government.
(2) Where the accumulated balance due and payable to an employee includes any
amount transferred from another recognised provident fund or funds of a previous
employer or employers, the continuous service period for the purposes of sub-para -
graph (1)( a ) or ( b ) shall include the period or periods served under the aforesaid
previous employer or employers.
Tax on accumulated balance.
9.   Where the accumulated balance due to an employee is included in his total income
owing to the provisions of paragraph 8 not being applicable, then—
( a )   the Assessing Officer shall calculate the total of the various sums of
tax which would have been payable by the employee in respect of his
total income for each of the years concerned if the fund had not been a
recognised provident fund; and
( b )   the amount by which such total exceeds the total of all sums paid by or
on behalf of such employee by way of tax for such years shall be payable
by the employee in addition to any other tax for which he may be liable

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for the tax year in which the accumulated balance due to him becomes
payable.
Deduction at source of tax payable on accumulated balance.
10.   In cases where paragraph 9 applies––
( a )   the trustees of a recognised provident fund; or
( b )   any person authorised by the regulations of the fund to make payment
of accumulated balances due to employees,
shall deduct from the accumulated balance at the time of payment, the amount
payable under the rule and the provisions of Chapter XIX-B shall apply as if the
accumulated balance were income chargeable under the head “Salaries”.
Treatment of balance in newly recognised provident fund.
11.   (1) Where recognition is accorded to a provident fund with existing balances,
an account shall be made of the fund up to the day immediately preceding the day
on which the recognition takes effect,—
( a )   showing the balance to the credit of each employee on such day; and
( b )   containing such further particulars as may be prescribed.
(2) The account shall also show in respect of balance to the credit of each employee—
( a )   the amount thereof to be transferred to the employee’s account in the
recognised provident fund (herein referred to as transferred balance);
and
( b )   such “transferred balance” shall be shown as balance to his credit in the
recognised provident fund on the date on which the recognition takes
effect, and sub-paragraph (4) and paragraph 5(5) shall apply accordingly.
(3) Any part of the balance to the credit of each employee in the existing fund not
transferred to the recognised fund shall be excluded from the recognised fund’s
account and shall be liable to income-tax as per the provisions of this Act, other
than this Part.
(4) Subject to rules made by the Board in this behalf,—
( a )   the Assessing Officer shall calculate the aggregate of all amounts in the
transferred balance that would have been liable to income-tax if this Part
had been in force since the fund’s institution, without regard to any tax
which may have been paid on any amount;
( b )   the aggregate of amounts in a transferred balance, if any, shall be deemed
to be income received by the employee in the tax year in which the
recognition of the fund takes effect and shall be included in the
employee’s total income for that tax year;
( c )   for the purposes of assessment, the remainder of the transferred balance
shall be disregarded, but no other exemption or relief, by way of refund
or otherwise, shall be granted in respect of any sum comprised in such
transferred balance.
(5) In cases of serious accounting difficulty, the approving authority may, subject to
rules, make a summary calculation of the aggregate as provided in sub-paragraph (4).

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(6) Nothing in this paragraph shall affect the rights of the persons administering
an unrecognised provident fund or dealing with it, or with the balance to the credit
of any individual employee prior to recognition, in any manner permitted by law.
Accounts of recognised provident funds.
12.   (1) The accounts of a recognised provident fund shall be maintained by the
trustees of the fund in such form, for such period, and contain such particulars, as
may be prescribed.
(2) The accounts shall be available to inspection by the income-tax authorities at
all reasonable times, and the trustees shall provide the Assessing Officer with the
abstracts of such accounts as may be prescribed.
Appeal.
13.   (1) An employer objecting to an order of the approving authority not granting
recognition or withdrawing recognition from a provident fund may appeal to the
Board, within sixty days of such order.
(2) The appeal shall be in such form and verified in such manner, and subject to the
payment of such fee as may be prescribed.
Treatment of fund transferred by employer to trustee.
14.   (1) When an employer who maintains a provident fund, whether recognised or
not, for the benefit of his employees and has not transferred the fund or portion of
it, transfers such fund or portion to trustees in trust for the participating employees,
the transferred amount shall be deemed to be of the nature of capital expenditure.
(2) When an employee receives the accumulated balance due to him from the
fund, any portion of such balance representing the employee’s share of the amount
transferred to the trustees (without addition of interest and exclusive of employee’s
contributions and interest thereon) shall be deemed to be,—
( a )   employer’s expenditure under section 34;
( b )   incurred in the tax year in which the accumulated balance due to the
employee is paid,
provided an arrangement for deduction of tax at source has been made from the
amount of such share by the employer.
PART B
APPROVED SUPERANNUATION FUNDS AND GRATUITY FUNDS
Interpretation.
1.   For the purposes of this Part, unless the context otherwise requires, “approv -
ing authority”, “employer”, “employee”, “contribution” and “salary”, in relation
to superannuation funds and gratuity funds shall have, the meanings as assigned
to those expressions in paragraph 2( a ), ( b ), ( c ), ( d ) and ( i ) of Part A in relation to
provident funds.
According approval to superannuation fund and its withdrawal.
2.   (1) The approving authority may grant approval to any superannuation fund or
its part, or any gratuity fund, as the case may be, which in his opinion satisfies the