SCHEDULE XI - RECOGNISED PROVIDENT FUNDS

Income-tax Act, 2025

At a Glance

These two texts are versions of Schedule XI dealing with recognised provident funds, approved superannuation funds and gratuity funds: Document 1 is titled "SCHEDULE-XI of Income-tax Act, 2025" (Act version) and Document 2 is titled "Income Tax Bill, 2025 - Old Version" (Bill - old). They are largely congruent substantively but contain drafting differences: textual refinements, cross-reference variations, and at least one change in statutory reference governing "Government securities." Impacted parties include employers, trustees of funds, employees participating in such funds, tax authorities and the Board (Rule-making body). No effective date is stated in the texts provided.

Background & Scope

Statutory hook: Schedule XI [See section 2(91)] (recognised provident funds; approved superannuation and gratuity funds) as part of the Income-tax law corpus. The Schedule sets out recognition/approval regimes, definitions, conditions for recognition/approval, tax treatment of contributions/accumulations, reporting and procedural obligations, powers of the Board to make rules, and appeals against adverse administrative orders. Definitions provided include "approving authority", "employer", "employee", "contribution", "balance to the credit of an employee", "annual accretion", "accumulated balance due to an employee", "regulations of a fund" and "salary". No definitions of "Board", "Fund Commissioner" or effective dates are provided within the Bill text.

Statutory Provision Mode

Text & Scope

The document is SCHEDULE-XI concerning recognised provident funds, approved superannuation funds and gratuity funds. It is presented as Part A (Recognised Provident Funds), Part B (Approved Superannuation Funds and Gratuity Funds), and Part C (rule-making powers). The Schedule operates under the Income Tax Bill/Act framework (See section 2(91)). Coverage extends to recognition and approval of funds, conditions for recognition/approval, tax treatment of contributions, interest and accumulated balances, accounts and reporting requirements, appeals against recognition/approval decisions, and Board rule-making powers. The Schedule excludes funds governed by the Provident Funds Act, 1925.

Interpretation

The text frames legislative intent to regulate tax consequences of employer and employee contributions to employment-related retirement funds while permitting administrative oversight through an "approving authority" (Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner) and rule-making by the Board. The drafting emphasises:

• Recognition/approval is discretionary, conditional and revocable by administrative authority.
• Tax treatment is tied to compliance with specified structural conditions (trust form, vesting, nature of fund assets, payment/withdrawal rules, and residency/employee scope).
• Where conditions are not met (or not applicable), ordinary tax rules apply (e.g., accumulated balances may be included in total income and treated as salary in certain contexts).

Exceptions/Provisos

The Schedule contains several provisos and relaxations:

• Paragraph 1: Exclusion - Schedule does not apply to funds covered by the Provident Funds Act, 1925.
• Part A paragraph 5: Approving authority may relax conditions (e.g., funds maintained by employers with principal place of business outside India provided <=10% employees outside India; special contribution rules for employees serving in armed forces or national service; retention of accumulated balances on employee request; special relaxation for low-salary employees and contingent bonuses).
• Part A paragraph 8: Exclusion of accumulated balance from total income when continuous service >=5 years or termination for specified causes; transfer to recognised fund or notified pension scheme also qualifies.
• Part B paragraph 3: Approval for superannuation/gratuity funds requires irrevocable trust, >=90% employees in India and payment of benefits in India, among other conditions.
• Part C: Rule-making constrained by statutory limits (e.g., no rule can require more than 50% of fund money to be invested in government securities - note differing statutory source in drafts).

Illustrations

• Example 1: An employee with continuous service of six years receives accumulated balance on cessation of employment - the accumulated balance is excluded from the employee's total income under paragraph 8(1)(a).
• Example 2: An employer contributes 15% of an employee's salary to a recognised provident fund; the portion exceeding 12% (i.e., 3%) is "deemed to have been received by the employee" and included in his total income for that tax year under paragraph 6.
• Example 3: A provident fund is recognised but a portion of its assets includes capital gains from transfer of capital assets - such gains are permitted fund components under paragraph 4(e)(v).

Interplay

The Schedule expressly interacts with:

• Provident Funds Act, 1925 - funds under that Act are excluded from this Schedule.
• Employees' Provident Funds and Miscellaneous Provisions Act, 1952 - paragraph 4(f) ties eligibility to establishments covered u/s 1(3) or notified u/s 1(4) of that Act, and to exemptions u/s 17 schemes.
• Other tax provisions - paragraph 6 links to rates fixed by Central Government by notification for interest treatment; paragraph 10 invokes Chapter XIX-B procedural rules for tax deduction at source (TDS) as if the balance were salary.
• Rule-making restrictions reference a statute governing "Government securities" (the Bill and Act texts differ as to which statute supplies the definition), which affects investment regulation under Part C.

Differences between SCHEDULE-XI of Income-tax Act, 2025 and SCHEDULE-XI of Income Tax Bill, 2025 - Old Version

• Language and drafting variances: The Act text (Document 1) uses slightly different phrasing in definitions (e.g., "credited by or on behalf of any employee out of his salary, or by an employer out of his own funds" vs. Bill text "credited by or on behalf of any employee from his salary, or by an employer from his own funds"). These are drafting differences only and do not change substantive meaning.
  • Practical impact: Minimal; no change in legal effect.
• Terminology for certain clauses and cross-references: In Part C (power to make rules), Document 1 cites "Government Securities Act, 2006" and refers to "section 2(f) of the Government Securities Act, 2006"; Document 2 references "section 2 of the Public Debt Act, 1944" (or earlier draft language). The Bill (Document 2) also contains editorial footnotes and alternative wording such as "as prescribed" vs "may be prescribed" in some places.
  • Practical impact: Potentially material for interpretation of investment limits (i.e., which statutory definition of "Government securities" applies). If the Act adopts the Government Securities Act (2006) definition, that may differ from the Public Debt Act (1944) definition used in the Bill; this affects which instruments qualify as government securities for the 50% investment cap and could affect trustees' permitted investments.
• Substantive alignment and rewording of specific paragraphs: In some paragraphs the Act clarifies or restructures language (for example, paragraph 5(3) in Document 1 states "Irrespective of anything contained in paragraph 4(e) or (i),-" while Document 2 states "Irrespective of anything contained in paragraph 4(e) or paragraph 4(i),-".) These are editorial only.
  • Practical impact: None substantive; only formatting/drafting clarity.
• Headings, numbering and minor content differences: Document 1 uses headings such as "Accounts of recognised provident funds.- (1) The accounts..." while Document 2 uses similar headings but sometimes adds slight wording changes (e.g., "Appeal" vs "Appeals", "Liabilities of trustees on cessation of approval" vs "Liability of trustees on cessation of approval").
  • Practical impact: Procedural or interpretive impact is negligible unless an amended heading reflects a legislative intent to change multiplicity (e.g., singular/plural) - but the text of paragraphs remains substantively the same.
• Cross-references to other Schedules/Sections and Table references: Document 1 refers to "Schedule II (Table: Sl. No. 8)" in Part B para 7; Document 2 also references Schedule II (Table: Sl. No. 8) but a footnote corrects some earlier drafting errors elsewhere. There is no material difference in the substantive treatment.
  • Practical impact: None substantive; only a drafting correction in the Bill had been noted.
• Rule-making clause references to Board powers and section 534: Document 1 ends Part C with "All rules made under this Part shall be subject to section 534." Document 2 likewise ends with "Rules to be subject section 534.-All rules..." The Bill includes a minor textual difference in citation of the enabling section for rules (Public Debt Act vs Government Securities Act), as noted above.
  • Practical impact: The practical effect is to confirm executive rule-making remains subject to section 534; no substantive change beyond the securities definition difference flagged earlier.

Practical Implications

• Compliance and risk areas: Trustees and employers must ensure funds comply with structural conditions (trustee vesting, non-revocability, permitted assets, payment rules, employee/residency thresholds) to secure recognition/approval and preserve tax exemptions. Failure may expose accumulated balances to inclusion in employee's taxable income and create TDS obligations under Chapter XIX-B.
• Record-keeping/evidence: The Schedule requires maintenance of prescribed accounts, availability of records for inspection and provision of abstracts to the Assessing Officer. Trustees should retain clear records of employee contributions credited, employer contributions, interest calculations, transfers between funds, and documentation supporting conditions for exemption (e.g., proof of continuous service, reasons for termination).
• Investment compliance: Trustees must monitor permitted investments and the 50% government securities cap in rules - attention is required to which statutory definition of "government securities" is applied (see differences noted above).

Key Takeaways

• The Schedule conditions tax-favourable treatment on strict structural and operational criteria for provident, superannuation and gratuity funds.
• Employer contributions above specified thresholds (12% for provident funds) and excess interest credited at rates above notified ceilings are taxable in the hands of employees.
• Recognition/approval is administratively controlled and revocable; trustees must comply with information, accounts and reporting obligations and face inspection and appeal procedures.
• Relaxations exist for overseas employer funds (<=10% employees outside India), armed forces service, retention of transferred balances, and low-salary employees - but only at approving authority's discretion and subject to rules.
• When recognition/approval is accorded to funds with pre-existing balances, transferred balances may be brought into tax in the tax year recognition takes effect, subject to Board rules and possible summary calculation in accounting difficulty cases.
• Trustees remain potentially liable for tax consequences even after cessation of approval/recognition in respect of payments attributable to earlier periods.
• Minor drafting differences between Bill and Act versions are mostly editorial; the notable substantive drafting difference concerns which statute defines "government securities" for investment limits, affecting permissible investments.

Full Text:

SCHEDULE XI - RECOGNISED PROVIDENT FUNDS