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Could the amount deducted towards corpus pension fund be salary?

QUESTION: I am an officer of a public sector bank. I am getting an amount of about Rs.2.80 lakh as arrears on pay revision from which Rs.40,000 is deducted towards provident fund contribution.

Since I am also using the occasion for availing myself of the option to join the pension scheme, an amount of Rs.1 lakh is deducted from my arrears as contribution to the corpus fund as a condition for availing the option. I am worried whether my employer would consider the gross arrears as reduced only by provident fund contribution under Sec. 80C and deduct tax from Rs.2.40 lakh as my income liable for tax deduction at source.

Since I am not receiving the amount of Rs.1 lakh which is retained towards corpus and in fact I would not receive any part of the corpus except for pension on which I will be paying tax, only the net arrears should be taken into consideration. I would like to be advised whether this is a correct understanding.

I have, meanwhile, addressed a letter to the Income-tax Officer/ Public Relation Officer for a clarification in this regard in order to be able to convince the employer, if he wants to take a line of abundant caution and deduct tax from the gross salary.

ANSWER: The amount that is receivable is on account of settlement by which the assessee is permitted the option to avail the pension scheme on specific amount being withheld from the arrears otherwise due so that the claim for arrears and the retention on the part of the amount towards corpus cannot be delinked. An employee can be assessed only on the amount that is due to him.

It cannot be split up between various components which go into the computation of the net amount of salary payable to him. As rightly pointed out by the reader, the amount appropriated towards corpus fund will not be available to him at any time.

The pension amount apparently paid out of such common corpus fund is always taxable in the respective years.

Patent instance

Taxation of corpus fund as part of emoluments would be a patent instance of double taxation. It is only the amount that is due to the assessee after the amount appropriated towards corpus that can be taken as salary within the definition of Sec. 17 of the Income-tax Act, 1961. For purposes of tax deduction at source, the law is even more transparent in that the tax deduction is required under Sec. 192 in respect of payment of salary, which has to be made on any income chargeable under the head salaries “at the time of payment” so that even the amount chargeable becomes tax deductible only at the time of payment.

Since the amount retained towards the corpus is not paid to the employee, the question of tax deduction at source cannot arise even in respect of such withheld amount for this reason.

Employer need not deduct tax on the gross arrears of salary which was not payable nor paid.

If the employer is not convinced about this position of law, the reader has no option except to claim refund from the assessing officer by filing a return in due course for the excess deduction.

The reader says that he has sought clarification from the Income-tax Department.

Sec. 197 provides for a certificate of deduction at nil or at lower rate.

An application to the assessing officer can be made for deduction of a rate as may be applicable after taking into consideration the net income.

There is, however, no bar for any clarification to be issued to the employer as required by the reader in such cases, which are patent, by the Commissioner of Income-tax or any other responsible member of the Income-tax Department. If the reader gets a response and that is also a favourable one consistent with law, he can regard himself as a lucky person.

S. RAJARATNAM

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