Annual Accretion – Retirement Benefits & Superannuation

Is your employer contributing huge amounts to your PF? Watch out! If the total contribution to PF, NPS, and Superannuation exceeds ₹7.5 Lakh in a year, the excess is taxable as Perquisite.

What is Annual Accretion?

Section 17(2)(vii): It refers to the taxable limit on employer's contribution to retirement funds.

The Funds Covered:

1. Recognized Provident Fund (RPF).
2. National Pension System (NPS).
3. Approved Superannuation Fund.

The Limit: ₹7,50,000 per annum (Combined Total).

Taxability:

• Contribution > ₹7.5L: Taxable as Perquisite.
• Interest on Excess Contribution: Also taxable as Perquisite (Section 17(2)(viia)).

Why was this Introduced?

To tax High Net Worth Individuals (HNIs) who were parking huge tax-free amounts in PF/NPS as a salary component. The ₹7.5L cap ensures that the tax benefit is capped.

Calculation of Taxable Amount

1. Excess Contribution

Simple! Taxable Perquisite = (Employer Contribution to RPF + NPS + Superannuation) - ₹7,50,000

Example:

• Salary: ₹50 Lakh.
• Employer RPF: ₹6,00,000.
• Employer NPS: ₹3,00,000.
• Total Employer Contribution: ₹9,00,000.
• Taxable Excess: ₹9,00,000 - ₹7,50,000 = ₹1,50,000.

2. Annual Accretion (Interest/Return on Excess)

The interest earned on the excess contribution is also taxable.

Formula: TP = (PC / 2) * R + (PC1 + TP1) * R

Where:

• TP: Taxable Perquisite (Current Year Interest).
• PC: Excess Contribution for Current Year (e.g., ₹1.5L above).
• PC1: Accumulated Excess Contribution from Previous Years.
• TP1: Accumulated Taxable Interest from Previous Years.
• R: Rate of Return (I / Favg).
  • I: Total Income credited to the fund.
  • Favg: (Opening Balance + Closing Balance) / 2.

Practical Example

Mr. Raj (FY 2024-25):

• Employer Contribution to RPF: ₹10,00,000.
• Limit: ₹7,50,000.
• Excess Contribution (PC): ₹2,50,000 (Taxable immediately).

Interest Calculation:

• Opening Balance of Fund: ₹50,00,000.
• Closing Balance: ₹65,00,000.
• Interest Credited: ₹5,00,000.

Step 1: Calculate Rate (R)

• Average Fund: (50L + 65L) / 2 = ₹57,50,000.
• R = 5,00,000 / 57,50,000 = 0.087 (8.7%).

Step 2: Calculate Interest Perquisite (TP)

• TP = (2,50,000 / 2) * 0.087
• TP = 1,25,000 * 0.087 = ₹10,875.

Total Taxable Perquisite:

1. Excess Contribution: ₹2,50,000.
2. Interest on Excess: ₹10,875.
3. Total: ₹2,60,875.

Summary Table

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