The banking industry has sought an amendment to the Income-Tax Act that will enable banks to make a greater provision for pension liabilities. Banks are mandated to disclose their pension liabilities due to changes in accounting standards.
At present, banks have a cap of 27% of the employees salary for providing annual contribution. However, banks want removal of the cap so they can make greater contribution to provide for liability, to decrease the extent of unfunded liability.
While this does not decrease the liability itself, it allows banks to get tax deduction for the extra contribution. This is an anomaly and has to be addressed. The Income-Tax Act will need to accommodate the changes in the accounting standards, a banker said.
As per Section 36(1)(iv) of the Income-Tax Act, 1961, a sum paid by the assessee as an employer by contribution towards a recognised provident fund or an approved superannuation fund shall be allowed as deduction.
However, rule 87 of the Income-Tax Rules, 1962, provides that the annual contribution by the employer to a fund of an employee shall not exceed 27% of his salary for each year as reduced by the employers contribution, if any, to a provident fund in respect of the same employee for the year. The changes to the accounting standard take effect in respect of accounting periods commencing on or after December 7, 2006.
To take into account the burden of pension liabilities under the defined benefit scheme, in the context of AS 15 and increase in the life expectancy over the past 45 years from the time the Income-Tax Rules, 1962, came into effect, there is a need to dispense with the limit, according to the recommendation to the ministry of finance.
The rules appear to have been framed in the past keeping in mind defined contribution schemes rather than defined benefit schemes. The defined benefits under the pension schemes administered by the public sector banks are also cleared by the government and, therefore, there is a strong case to remove the ceiling of 27% prescribed under Rule 87, Indian Banks Association (IBA) has said.
So far, banks were not mandated to disclose the extent of their pension liabilities in the balance-sheets. However, under new accounting norm AS 15, they will have to make a provision for pensions. The liability is estimated at a staggering Rs 26,000 crore and an additional Rs 14,000 crore on account of the changes in the accounting method. Under the existing system, banks need to provide for liabilities during the tenure and even after the death of the employee.