But I don't want to be registered in SSF. Do I have that option?
You may not want to. But this is not an option. I cannot opt to not participate in SSF.
Are everyone other than me registered in SSF? And why?
They had to / have to. Some commercial Banks of Nepal have been taking a strong stance against and some of their reasoning is very logical which we will discuss in other blog. Few of the them have been registered already. The rest will also likely submit to the SSF and GoN and get registered eventually. The participation may not be that overwhelming now but maybe it will improve as the programs under SSF are more market friendly and less burdensome. See the list of registered employers here.
What % of contribution from employer is subject tax to employee? 20% or 18.33%?
One view is that since SSF contribution is entirely a contributory plan (in a contributory plan, the employee also pays into the plan from their income), the total amount of the contribution from employer (20%) is to be included as an income of the employee. In this view both the 8.33% component and 1.67% component will be included in the taxable income of the employee.
Another view is that, since the amount of contribution from employer under old age scheme only constitutes 18.33% of the total contribution i.e 20%, only the portion of the contribution that relates to old age scheme is to be incluced as an income of the employee. The reasoning for this is, it is understood that the rest 1.67% of the contribution is made instead of the employer’s expense on medical insurance and accident insurance under Section 55 of the Labor Act 2074. As such insurance contribution made by employer under the Labor Act was an statutory contribution constituing an expense of the employer for business purpose, it was not subject to taxation at the hands of employee. This view compares the percentage contribution to each of the scheme with the total contribution of the employer, which may not always be a good comparision as the % allocation between the schemes may differ as per the program of the SSF as well. So this view will likely not be true.
Also, as per the tax computation example published by SSF (Page 6, link here), SSF has taken the first view on the same. SSF has communicated that the tax computation model was prepared in consultation with IRD. In example 17.13.17 of the Income Tax Directive 2077, IRD has also provided similar interpretation, link here.
What % of the contribution can be claimed for deduction? 31% or 28.33%?
The different views
One view is that since SSF contribution is entirely a contributory plan (in a contributory plan, the employee also pays into the plan from their income), the total amount of the contribution made from the part of both the employer and employee is eligible for deduction from the taxable income of the emplyer, as per the Income Tax Act, 2058.
Another view is that, since the amount of contribution from employer under old age scheme only constitutes 18.33% of the total contribution from employer and 10% of the total contribution from employee, totalling to 28.33% is the amount actually made to the retirement scheme of the SSF, is the only portion allowed for the deduction for tax purpose as retirement contribution.
Also, as per the tax computation example published by SSF (Page 6, link here), SSF has taken the first view on the same. SSF has communicated that the tax computation model was prepared in consultation with IRD. But as per the example 17.13.17 of the Income Tax Directive 2077, IRD has also provided similar interpretation to the first view above, link here.
Why the confusion?
अवकाश कोषको स्वीकृति
दफा ६३(२): स्वीकृत अवकाश कोषको हिताधिकारी प्राकृतिक व्यक्तिले कुनै आय वर्षमा सो कोषमा गरेको अवकाश योगदान आफ्नो कर योग्य आयको गणना गर्दा घटाई पाउन दाबी गर्न सक्नेछ ।
दफा ६३ (३): उपदफा (२) मा जुनसुकै कुरा लेखिएको भए तापनि सो उपदफा बमोजिम कुनै आय वर्षमा कुनै व्यक्तिबाट घटाई पाउन दाबी गरिएको रकम तोकिएको अवकाश योगदानको सीमाभन्दा बढी हुने छैन ।
अवकाश योगदानको सीमा
नियम २१: कुनै आय वर्षमा स्वीकृत अवकाश कोषको हिताधिकारी प्राकृतिक व्यक्तिले अवकाश कोषमा अवकाश योगदान गर्दा तीन लाख रुपैयाँ वा निजको निर्धारण योग्य आयको एक तिहाईमा जुन घटी हुन्छ सो रकमसम्म आफ्नो कर योग्य आयबाट घटाउन सक्नेछ । तर योगदानमा आधारित सामाजिक सुरक्षा कोष ऐन, २०७४ बमोजिम स्थापना भएको सामाजिक सुरक्षा कोषमा योगदान गर्ने कोषको हिताधिकारी प्राकृतिक व्यक्तिले सो कोषमा योगदान गर्दा पाँच लाख रुपैयाँ वा निजको निर्धारण योग्य आयको एक तिहाईमा जुन घटी हुन्छ सो रकमसम्म आफ्नो कर योग्य आयबाट घटाउन सक्नेछ ।
What is the confusion here? The problem here is that Section 63 seems to allow only the retirement contribution (अवकाश योगदान) made to approved retirement fund as a deduction from the taxable income. But As per Rule 21, contribution (योगदान) made to the SSF can be allowed for deduction. But the confusion here is:
1. Can Rule 21 allow for the deduction of entire amount of contribution for reduction from taxable income even when Section 63 seems to have limited it to the extent of retirement contribution only?
Ans: Since Rule 21 is not limited to application of Section 63, maybe this is possible. Not sure.
2. What is retirement contribution for the purpose of Income Tax Act, 2058?
Ans: दफा २(च): “अवकाश योगदान रकम” भन्नाले अवकाश भुक्तानीको व्यवस्था वा सोको भविष्यमा गरिने व्यवस्थाको लागि अवकाश कोषमा गरिएको भुक्तानी सम्झनु पर्छ ।
3. Is the term retirement contribution defined for the purpose of Social Security Fund Act, Rules or Directives?
4. All the schemes under SSF contains some form of retirement payments (retirement amount or pension amount)?
Ans: Yes in one form or the other, all the schemes of SSF contains retirement payments.
What is the view of IRD and SSF here?
As per the tax computation example published by SSF (Page 6, link here), SSF has taken the first view on the same. SSF has communicated that the tax computation model was prepared in consultation with IRD. But as per the example 17.13.17 of the Income Tax Directive 2077, IRD has also provided similar interpretation to the first view above, link here. So, I think, it is pretty same to assume that the total 31% amount is eligible for deduction despite the confusions.
What is this random 2078.03.31 cut off date?
This is a significant cut off date if the contributor is actually thinking of participating in SSF.
As per Directive on Operation of Social Security Schemes, 2075
दफा २०(१): संवत् २०७८ साल साउन १ गते वा सो भन्दा पछि कोषमा योगदान प्रारम्भ गर्ने सबै योगदानकर्ता निवृत्तभरण योजनामा समावेश हुनेछन्।
दफा २०(२): यो दफा प्रारम्भ हुँदाका बखत कोषमा योगदान गर्ने योगदानकर्ता तथा यो दफा प्रारम्भ भएपछि संवत् २०७८ साल असार मसान्तसम्ममा कोषमा योगदान प्रारम्भ गर्ने योगदानकर्ताले कोषमा लिखित रुपमा निवेदन दिई निवृत्तभरण योजनामा सहभागी हुन सक्नेछ ।
So, what is the implication of this date? 2078.03.31
As discussed in my another blog here, 20% of Basic Salary – MAX(20% of Basic Salary – 3 × Prevalent Minimum Basic Remuneration, 0) amount is allocated to the Pension Plan Sub-scheme of the SSF.
Rest of the 8.33% of Basic Salary + Rs. X + MAX(20% of Basic Salary – 3 × Prevalent Minimum Basic Remuneration, 0) goes into the Retirement Plan Sub-scheme of SSF.
However, if the participant starts contribution in SSF before 2078.03.31 then the participant can decide to opt to transfer the amount in Pension Plan Sub-scheme to Retirement Plan Sub-scheme. So to an employee participating in the SSF before 2078.03.31, the SSF is no different than other approved retirement funds, i.e. the amount can be withdrawn at the point of termination of the employment engagement.
GoN is making the SSF contribution for the month of 2078.02 and 2078.03 as a part of COVID relief?
Yes, as per Para 60 of the Budget Speech for FY 78/79 GoN has provided this benefit to help employer and employee at the time of COVID crisis.
हरफ ६०: सामािजक सुरक्षा कोषमा आबद्ध श्रमिक तथा रोजगारदाताले जम्मा गर्नुपर्ने २०७८ जेठ र असार मिहनाको योगदान रकम नेपाल सरकारले बेहोर्नु गरी बजेट छुट्याइएको छु।
The question is, how will this benefit be treated for accounting and tax purposes to the employer and employee?
1. The employer will book the portion of their contribution (20%) as regular salary expense for the period.
2. The employer will include the portion of their contribution (20%) in the taxable income of the employee, as this is a regular contribution that is paid into by the employer to the employee. Even though the amount has been paid into by the GoN, it still is a payment being made by the employer to the employee.
3. The employer will deduct the taxes by considering the amount paid into by the GoN on their behalf (i.e 20%) notionally as taxable iincome and also not deduct the portion of the contribution of the employee (i.e. 10%) and make the net payment of the salary to the employee.
4. Although the rest 11% contribution from GoN doesn’t seem to be in the ambit of Section 87 of the Income Tax Act, employer may prefer to include that amount as well in the taxable income of the employee to resolve in advance any issues relating to potential non taxation, difficulty in filing of income tax returns of the employee. However, there may be different views regarding the same.
5. The employer will book the income of the contribution paid into by GoN in form of income or reduce the salary expense to that extent.