Rule 305 — Ordinary annual contributions.
The rule caps the employer's yearly contribution to a fund for each employee. It shall not exceed 27% of the employee's salary for each year, as reduced by any contributions the employer made to a provident fund for the same employee during that year, whether recognised or not.
Approval of a fund carries tax consequences for the employer's contribution, so the amount that may be put in for each employee has to be limited, and limited on a combined basis. The reduction for provident fund contributions stops the same salary supporting a full contribution to both a provident fund and this fund, and it counts unrecognised provident funds too.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Ceiling on the employer's yearly contribution for each employee | Shall not exceed 27% of their salary for each year | Reduced by any contributions the employer made to a provident fund for the same employee during that year, whether recognised or not. It is an upper limit on what may be contributed, not a rate at which contribution is required | Rule 305 |
27% is a ceiling, not the contribution. Nothing in the rule requires an employer to contribute 27% or any other proportion; it says only that the yearly contribution shall not exceed that figure. The ceiling is also net: the 27% of salary is reduced by whatever the employer contributed to a provident fund for the same employee during that year, and the rule expressly counts a provident fund whether recognised or not, so an unrecognised fund does not sit outside the computation. The test is per employee and per year, so a shortfall in one year cannot be carried into the next.
An employee's salary for the year is Rs. 12,00,000, so 27% is Rs. 3,24,000. The employer has already contributed Rs. 1,44,000 to a provident fund for the same employee that year. The ceiling on the employer's contribution to the fund for that employee is the balance, Rs. 1,80,000 — and the employer may contribute less, since the rule sets a limit and not an amount.
You meet it when an employer's annual contribution for an employee is tested against the limit, in the fund's own records and in any question about the treatment of the contribution.
The yearly contribution of the employer to a fund for each employee shall not exceed 27% of their salary for each year as reduced by any contributions the employer made to a provident fund for the same employee during that year, whether recognised or not.
