Explain the term Annual Accretion or Transferred Balance as used in the Income Tax Act, 1961.

Annual Accretion:  means accretion to the balance on the previous year at the credit of the employee. Participating in a Recognized provident fund to the extent provided in Rule 6 of Part A which is as follows—

• Employer’s contribution to Recognized provident fund in excess of 12% of employee’s salary and
• Interest credited to employees on the accumulated balance of the Recognized Provident Fund so for as it exceeds the rate of 9.5%. The Annual accretion is income deemed to be received during the previous year.

Transferred Balance:  When an unrecognized provident fund is recognized for the first time by the Commissioner of Income tax, the balance standing to the credit to employee’s provident fund account at the time of recognition is called ‘Transferred balance’ Now the balance in the Fund Account is deemed to be the balance of Recognized Provident Fund from the very beginning i.e, from the date of its institution. Thus, the balance of unrecognized P.F. when converted into Recognized Provident Fund becomes the balance of Recognized Provident Fund. The aggregate of all sums comprised in the Transferred balances which would have been liable had the fund been recognized from the very beginning (e.g. Annual accretion) is taxable in the year in which fund is recognized.