Rule 16 of the Income-tax Rules, 2026

Where this rule sits

Rule 16 gives effect to Section 17 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.

← Rule 15  ·  Rule 17 →

What this rule does

Sub-rule (1) prescribes the formula for the annual accretion referred to in section 17(1)(i) — the interest, dividend or any other amount of a similar nature accruing during the tax year to the balance to the credit of the fund or scheme referred to in section 17(1)(h). The taxable perquisite is tp = (pc/2) × R + (PC1 + TP1) × R.

The rule defines each term. Tp is the taxable perquisite under section 17(1)(i) for the current tax year. TP1 is the 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 is the aggregate amount of principal contribution made by the employer in excess of Rs. 750000 to the specified fund or scheme during the tax year, and PC1 is the same aggregate for the tax year or years commencing on or after the 1st April, 2020 other than the current tax year. R is I divided by F(avg.), where I is the aggregate amount of income accrued during the current tax year in the specified fund or scheme account, and F(avg.) is the opening balance to the credit of the fund or scheme on the first day of the current tax year plus the closing balance on the last day, divided by two.

Sub-rule (2) adds two definitional points: "specified fund or scheme" means a fund or scheme referred to in section 17(1)(h); and where the aggregate of TP1 and PC1 exceeds the aggregate balance to the credit of the specified fund or scheme on the first day of the current tax year, the excess is ignored in computing that aggregate.

Why it is there

Section 17(1)(h) brings the employer's contribution beyond a limit into the employee's hands, and section 17(1)(i) goes further and taxes the accretion on that already-taxed excess. The Act does not say how to isolate the earnings attributable to the excess contribution from the earnings of the whole fund balance, so the rule supplies an apportionment. R is the fund's own rate of return for the year, applied to the current year's excess contribution taken at half — reflecting that it accrues through the year — and to the whole of the earlier excess contributions and the accretion already taxed on them.

Who it applies to

• An employee in whose hands annual accretion is chargeable as a perquisite under section 17(1)(i)
• An employer computing the perquisite value and deducting tax on salary

The figures, and what each one turns on

What this means in practice

The perquisite is not the fund's income; it is the fund's rate of return applied to the excess contributions. R is computed from the fund's own figures for the year, so an employee cannot substitute a declared interest rate for I divided by F(avg.). The current year's excess enters at half its value while every earlier year's excess since the tax year commencing on or after 1st April, 2020 enters in full, along with the perquisite already taxed on it, which is why the charge compounds year on year. Sub-rule (2)(b) is the only relief in the formula: where TP1 and PC1 together exceed the opening balance of the fund, the excess is ignored, so the taxable base can never exceed what is actually standing to the employee's credit at the start of the year.

An example

An employer contributes Rs. 10,00,000 in the tax year to a specified fund for an employee, so pc is Rs. 2,50,000 — the excess over Rs. 750000. Earlier excess contributions since the year commencing 1st April, 2020 total Rs. 4,00,000 (PC1) and perquisite already taxed on them totals Rs. 40,000 (TP1). If income accrued in the fund for the year is Rs. 1,20,000 and the average of the opening and closing balances is Rs. 20,00,000, R is 0.06, and tp is (2,50,000/2) × 0.06 plus (4,40,000) × 0.06, that is Rs. 7,500 plus Rs. 26,400, or Rs. 33,900.

Where you meet this rule

In the perquisite figure shown in the salary statement and in the return of income; an employee normally meets it as a line in the employer's computation of taxable salary rather than as a rule applied by hand.

The words themselves

What people get wrong

• Taking pc as the whole employer contribution. Pc and PC1 are only the amounts contributed in excess of Rs. 750000.
• Applying R to the current year's excess in full. The formula in sub-rule (1) takes pc at half; only PC1 and TP1 are taken in full.
• Leaving out TP1. The perquisite already taxed in earlier years is added to PC1 before R is applied, so the base grows each year.
• Reaching back before the tax year commencing on or after the 1st April, 2020. TP1 and PC1 are defined by reference to those years only.
• Using a notified or declared rate of interest as R. R is I over F(avg.), both drawn from the specified fund or scheme's own figures for the current tax year.