Rule 295 — Assigning or creating a charge on beneficial interest in a recognized provident fund.
Where an employee assigns or creates a charge on his beneficial interest in a recognised provident fund, the Assessing Officer, on learning of the assignment or charge, shall give notice to the employee. The notice informs the employee that if he does not cancel the assignment or charge within two months of receiving it, the consideration received for the assignment or charge shall be deemed to be income received by the employee in the tax year in which the Assessing Officer became aware of the situation, and shall be assessed accordingly.
A recognised provident fund carries tax privileges on the footing that the balance stays with the employee for retirement. Assigning the interest, or charging it, converts that balance into present value in the employee's hands without a withdrawal. The rule does not forbid it; it gives the employee a chance to undo it, and taxes the consideration if he does not.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Time to cancel the assignment or charge | Within two months of receiving the notice | Runs from the employee's receipt of the Assessing Officer's notice, not from the assignment or charge | Rule 295 |
| Year of charge if the assignment or charge is not cancelled | The tax year in which the Assessing Officer became aware of the situation | The consideration received is deemed to be income received by the employee in that year | Rule 295 |
Two dates decide the outcome and neither is the date of the assignment. The two months run from receipt of the notice, and the year of charge is the tax year in which the Assessing Officer became aware of the situation — which may be well after the year in which the assignment was made. What is deemed to be income is the consideration received for the assignment or charge, not the balance in the fund. Cancellation within the two months averts the deeming altogether, so the notice is an opportunity as much as a warning.
An employee charges his beneficial interest in a recognised provident fund in a tax year and receives Rs. 4,00,000 for it. The Assessing Officer learns of it two years later and issues a notice, which the employee receives in June. If the charge is not cancelled by the end of August, the Rs. 4,00,000 is deemed to be his income of the tax year in which the officer became aware of the situation, and is assessed accordingly.
You meet it as a notice from the Assessing Officer after a provident fund interest has been assigned or charged, and then as an addition in the assessment for the year in which the officer came to know of it.
if he does not cancel the assignment or charge within two months of receiving the notice, the consideration received for such assignment or charge shall be deemed to be income received by the employee in the tax year in which the Assessing Officer became aware of the situation
