Rule 16: Annual accretion on excess employer contributions
Rule 16 calculates taxable annual accretion attributable to excess employer contributions to the funds and schemes identified in section 17(1)(h). The calculation combines current-year excess contributions with relevant earlier contributions and accretion.
Official notified Income-tax Rules, 2026Need advice on Rule 16?
This article is for general information. Read the official Rules and applicable Act amendments, including the Taxation and Other Laws (Amendment) Act, 2026. If you need professional advice for your situation, contact Bizeneed.
On this page
Bare law
Rule 16 - Annual accretion referred to in section 17(1)(i)
(1) For the purposes of section 17(1)(i), annual accretion by way of interest, dividend or any other amount of similar nature during the tax year (herein referred to as the current tax year) to the balance of the credit of the fund or scheme referred to in section 17(1)(h), shall be the amount or aggregate of amounts computed in accordance with the following formula: — TP = (PC/2) × R + (PC1 + TP1) × R Where,– TP = Taxable perquisite under section 17(1)(i) for the current tax year; TP1 = aggregate of taxable perquisite under section 17(1)(i) for the tax year or years commencing on or after the 1st April, 2020 other than the current tax year; PC = aggregate amount of principal contribution made by the employer in excess of ₹ 750000 lakhs to the specified fund or scheme during the tax year; PC1 = aggregate amount of principal contribution made by the employer in excess of ₹ 750000 to the specified fund or scheme for the tax year or years commencing on or after the 1 st April, 2020 other than the current tax year; R = I/ F(avg.); I = aggregate amount of income accrued during the current tax year in the specified fund or scheme account; F(avg.) = aggregate amount of balance to the credit of the specified fund or scheme on the first day of the current tax year plus the aggregate amount of balance to the credit of the specified fund or scheme on the last day of the current tax year, divided by two.
(2) For the purposes of this rule,– (a) "specified fund or scheme" means a fund or scheme referred to in section 17(1)(h); (b) where the aggregate amount of TP1 and PC1 exceed the aggregate amount of balance to the credit of the specified fund or scheme on the first day of the current tax year, then the excess amount shall be ignored for the purpose of computing the aggregate amount of TP1 and PC1.
Introduction
Keep the tax on the excess contribution itself separate from the tax on its earnings. Section 17(1)(h) addresses the contribution; section 17(1)(i) and this rule address the attributable annual accretion.
Rule breakdown
Start with the parent contribution threshold
Section 17(1)(h) identifies aggregate employer contributions above ₹7,50,000 in the tax year to the listed recognised provident fund, section 124(1) scheme and approved superannuation fund accounts. Do not apply a separate ₹7,50,000 allowance to each listed fund without considering the aggregate statutory test.
The Gazette’s PC definition prints “₹750000 lakhs”. The bare-law quotation preserves that wording. The parent Act and the PC1 definition state ₹7,50,000; this guide uses that amount when explaining excess contributions. Check the official text and any applicable correction when preparing a filing.
Build the current and historical schedules
PC is the current-year principal contribution above the threshold. PC1 aggregates the relevant excess principal contributions for years commencing on or after 1 April 2020, excluding the current year. TP1 aggregates the corresponding taxable perquisites for those earlier years.
Carry forward an auditable schedule of earlier contributions and accretion. A current contribution figure alone does not supply the historical components.
Compute R and apply the complete formula
R = I / F(avg.). I is the income accrued during the current tax year in the specified account or accounts. F(avg.) is one half of the aggregate opening balance plus aggregate closing balance.
The formula is TP = (PC/2) × R + (PC1 + TP1) × R. It is not a flat percentage of all employer contributions, and the one-half factor applies to PC rather than to the entire expression.
Check the restriction on the historical component
If PC1 plus TP1 exceeds the aggregate opening balance in the specified fund or scheme, sub-rule (2)(b) requires the excess to be ignored for computing that combined amount. Apply this check before calculating the second component.
Do not silently divide by zero if the stated average balance is zero. Resolve the account facts and applicable treatment instead of substituting an invented statutory rate.
Illustrative calculation
Hypothetical: PC is ₹1,00,000, PC1 is ₹2,00,000, TP1 is ₹20,000 and the properly computed R is 0.08. Assuming the opening-balance restriction does not reduce PC1 plus TP1, TP is ₹50,000 × 0.08 + ₹2,20,000 × 0.08 = ₹21,600.
The example assumes the inputs meet the statutory definitions; it does not calculate the separate taxable excess contribution under section 17(1)(h).
Key takeaways
Separate current and earlier amounts
PC concerns the current year; PC1 and TP1 concern the stated earlier years.
Use an account-based rate
R equals current-year account income divided by the average opening and closing balance.
Apply the opening-balance restriction
Sub-rule (2)(b) limits the combined earlier PC1 and TP1 amount used in the calculation.
Practical checklist
- Reconcile contributions across the specified accounts.
- Maintain earlier-year PC1 and TP1 records.
- Check the opening-balance restriction before applying the formula.
Avoid
- Do not treat the Gazette’s extra word “lakhs” as multiplying the parent threshold.
- Do not halve both components of the formula.
- Do not confuse excess principal contribution with its annual accretion.
FAQs
What is the difference between PC and TP?
PC is the defined current-year excess principal contribution. TP is the taxable annual accretion computed by the formula.
Which earlier years are covered?
The definitions of PC1 and TP1 use years commencing on or after 1 April 2020, excluding the current tax year.
Can the full PC1 plus TP1 always be used?
No. Sub-rule (2)(b) requires ignoring the excess where their combined amount exceeds the specified aggregate opening balance.
Glossary
- PC
- The current-year excess employer principal contribution defined in the rule.
- R
- The ratio of current-year account income to the defined average account balance.
- TP1
- The aggregate taxable accretion for the specified earlier years.