Employee’s Contribution – Employer’s Income

While auditing the statutory payments, the foremost thing we focus on is whether the EPF & ESI contributions of employees were paid into the respective Govt. A/cs within the due date or not.

What if the employer hasn’t deposited the same within the due date?

Would there be any consequences for such a small thing?

Yes, my dear viewers. This has got a far-reaching impact on the Employer’s Total Income. Before getting into detail, let us understand a clause in the income definition under Income Tax Act,1961.

Well noted statutory contributions

Section 2(24) of the Act gives statutory definition of the income. It specifically included the following clause :

Clause (x) :- Any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees is considered as Income.

So, from the above clause, it can be understood that the employee contribution towards EPF & ESI will be constituted as income in the hands of the employer. But logically speaking, how can it be considered as income in employer hands, where he actually remits the same into the employee’s EPF/ESI A/c ?

Section 36 (Other Deductions for PGBP income) clarifies the above doubt.

Clause (va) of Section 36 states that any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date as Specified in the Respective Act is allowed as a deduction.

So, even though the employer considers the employee’s contribution as a liability in his books of accounts, it is actually treated as his income as per Income Tax Act, 1961.

Finally, if the employer fails to deposit EPF/ESI/any other statutory contribution from employee along with employer’s contribution within the due date of the Respective Acts

  1. Employee’s contribution will be treated as income in Employer’s hands &
  2. Employer’s contribution will not be allowed as an Expenditure u/s 36 of the Act.

So, failing to comply with the due date has got a double impact on the Employer’s Total Income. That is why, we (auditors) , in the course of audit, verify whether the statutory payments like EPF,ESI etc. were paid within the due date or not.

For your kind info. –> Due date for EPF & ESI is the 15th of the next month.

EPF COVID Special: Due Date for Feb and March 2020 is 15th May 2020

ESI COVID Special: Due Date for Feb is 15th April 2020 and for March 2020 is 15th May 2020

The above dates are applicable for FY 2019-20 & AY 2020-21.

Thank for reading “Employee’s Contribution – Employer’s Income

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CA Prabhath Sharma Ganti

Chartered Accountant in Practice. Enthusiastic and Innovative writer. Writes about Taxation, Business and General awareness aspects.