Section 29 — Employee Welfare Deductions | ITA 2025

Section 29 — DEDUCTIONS RELATED TO EMPLOYEE WELFARE

Section 29 covers deductions for employer contributions to employee welfare funds — recognised provident fund, approved superannuation, gratuity fund (employer-side; employee-side u/s 7); bonus / commission; staff welfare expenditure. Section 29 also catches the FA 2023 amendment requiring timely deposit of TDS / employees' PF contribution to qualify for deduction.

Statutory text — Income-tax Act, 2025

Marginal note — Deductions related to employee welfare

(1) The following sums, in the case of an assessee being an employer, shall be allowed as deduction in computing income chargeable under section 26:—

(a) any sum paid by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to—

(i) such limits, as may be prescribed, for recognising the provident fund or approving the superannuation fund; and

(ii) such conditions, as the Board may specify, for cases where the contributions are not made annually either as fixed amounts, or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or the contributions or to the number of members of the fund;

(b) any sum paid by way of contribution towards a pension scheme referred to in section 124, for an employee up to 14% of the salary of the employee in the tax year, where such salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites;

(c) any sum paid by way of contribution towards an approved gratuity fund created by the assessee for the exclusive benefit of his employees under an irrevocable trust;

(d) irrespective of anything contained in sub-section (2), any provision made for the purpose of making contribution towards approved gratuity fund or for the purpose of payment of any gratuity that has become payable during the tax year; 7[(e) the amount of contribution received from an employee to which the provi- sions of section 2(49)(o) apply, if it is credited by the assessee to the account

7. Substituted by the Finance Act, 2026, w.e.f. 1-4-2026. Prior to its substitution, clause (e) read as under : ‘(e) (i) the amount of contribution received from an employee to which the provisions of section 2(49)(o) apply, if it is credited by the assessee to the account of the employee in the relevant fund or funds by the due date;

(ii) for the purposes of sub-clause (i), “due date” means the date by which the assessee is required as an employer to credit employee contribution to the account of an employee in the relevant fund under any Act, rule, order or notification issued under it or under any standing order, award, contract of service or otherwise and the provisions of section 37 shall not apply for determining the “due date” under this clause.’ of the employee in the relevant fund or funds, on or before the due date of filing of return of income under section 263(1) for the tax year.]

(2) (a) Subject to the provisions of sub-section (1)(d), no deduction shall be allowed for any provision made for the payment of gratuity to the employees on their retirement or termination for any reason; and

(b) in case deduction has been allowed for any provision made under sub- section (1)(d), then no deduction shall be allowed on actual payment made from such provision.

(3) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under sub-section (1)(a) or (b) or (c), or as required by or under any other law in force. Deduction on certain premium.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 29	INCOME-TAX ACT, 1961 — s. 36 sub-clauses
Bonus / commission to employees	1961 s. 36(1)(ii) — preserved
Employer contribution to RPF / Approved Super / Gratuity Fund	1961 s. 36(1)(iv) — preserved
Employees' contribution to PF / ESI deposited within due date	1961 s. 36(1)(va) — strict — preserved
NPS s. 80CCD(2) employer contribution	1961 s. 36(1)(iva) — preserved

Section 29 of the 2025 Act consolidates the employee-welfare-deduction sub-clauses of 1961 s. 36 into a single section.

JUDICIAL EVOLUTION — Employees' PF (Checkmate Services)

The Supreme Court in Checkmate Services (P.) Ltd. v. CIT, (2022) 448 ITR 518 (SC), settled the long-running debate on s. 36(1)(va) — employees' contribution to PF / ESI MUST be deposited within the due date prescribed under the relevant Welfare Act (NOT the s. 43B return-filing date). Late deposit → permanent forfeiture of deduction.

HELD: The legislative intent in section 36(1)(va) read with section 2(24)(x) is clear — employees' contribution is deemed income of the employer when received, and is allowable as deduction only if deposited within the due date under the relevant Welfare Act. The s. 43B grace period for actual-payment-by-return-filing-due-date does NOT apply to employees' contribution. (per Checkmate Services ¶ 53).

"There is a marked distinction between the nature and character of the two amounts—the employer's contribution and the employees' contribution required to be deposited by the employer. The latter is the employees' money, held in trust by the employer; failure to deposit within the prescribed due date results in permanent forfeiture of deduction." (¶ 53)

JUDICIAL EVOLUTION — Bonus to Employees

CIT v. Loyal Textile Mills Ltd. line — bonus / commission paid to employees is deductible u/s 36(1)(ii) [now s. 29] PROVIDED it is genuine and not a profit-distribution disguised as bonus to circumvent dividend tax. Excessive payments to relatives / shareholders attract s. 36(1)(ii) proviso restriction.

DEPARTMENTAL PRACTICE

Form 3CD Item 20(b) — auditor reports each delayed deposit of employees' PF contribution. CBDT Circular 22/2015 dated 17-12-2015 had relaxed the position pre-Checkmate; that relaxation has been overruled by the SC. For employer contribution u/s 36(1)(iv) — must be to an APPROVED fund per Schedule IV; payments to non-approved funds disallowed.

PLANNING NOTES & LITIGATION DEFENCE

(i) STRICT compliance with monthly PF / ESI deposit due dates — typically 15th of following month for PF, 15th of following month for ESI. Late deposit = permanent forfeiture. Cite Checkmate. (ii) For employer contribution to non-statutory welfare funds, ensure CBDT approval — without approval, s. 36(1)(iv) deduction denied. (iii) For bonus / commission, document the connection to services rendered; avoid 'profit-share' characterisation. (iv) NPS employer contribution u/s 36(1)(iva) — up to 14% govt / 10% private — STANDALONE deduction (no s. 80CCE aggregation).

CROSS-REFERENCES

Section 7 — Income deemed received (PF accretion treatment).
Section 17 — Perquisite (excess employer PF / NPS / Super > ₹7.5L cap).
Section 37 — Actual-payment basis for tax / duty / cess (s. 43B equivalent).
Schedule IV — Provident fund / superannuation / approved gratuity fund rules.
Form 3CD Item 20(b) — auditor's reporting.

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