Employee Welfare Deductions: PF, Gratuity and Superannuation for Employers (Income Tax Act 2025)

Under the Income-tax Act, 2025, an employer's deduction for employee welfare sits in section 29. It allows contributions to a recognised provident fund, an approved superannuation fund, an approved gratuity fund, and a notified pension scheme (up to 14% of the employee's salary), plus a provision for gratuity that has become payable in the year. Section 29 deals with the employer's business income under section 26. Timing of the deduction is governed by section 37, and section 29(3) shuts the door on other welfare-fund contributions.

Section 29 does not mention bonus. This guide therefore covers what section 29 and its linked provisions actually say. Everything is taken from the Act as amended by the Finance Act, 2026 and the Income-tax Rules, 2026, with the section or rule number beside each point. Last reviewed on 10 November 2026.

Which employee welfare payments can an employer deduct under section 29?

Payment	Clause	What the Act says
Recognised provident fund or approved superannuation fund	29(1)(a)	Contribution paid, within prescribed limits for recognising the fund, and subject to Board conditions if contributions are not made annually on a fixed or definite basis
Notified pension scheme (section 124)	29(1)(b)	Contribution up to 14% of the employee's salary in the tax year. Salary here includes dearness allowance (if the terms of employment so provide) but excludes all other allowances and perquisites
Approved gratuity fund	29(1)(c)	Contribution to a fund created for the exclusive benefit of employees under an irrevocable trust
Gratuity provision	29(1)(d)	Provision for contribution to an approved gratuity fund, or for gratuity that has become payable during the tax year
Employee's own contribution you hold	29(1)(e)	Amount received from employees (section 2(49)(o)) is deductible if credited to the employee's fund account on or before the return due date under section 263(1)

The deduction is available to an assessee who is an employer, in computing income chargeable under section 26 (profits and gains of business or profession).

How much superannuation can be paid as an initial contribution?

When a superannuation fund is set up, the employer may pay an initial contribution for the past services of an employee. Under rule 306, for the section 29(1)(a) deduction, this contribution cannot exceed the total of 27% of the employee's salary for each year of past service, reduced by the employer's contributions to a provident fund (recognised or unrecognised) for the same employee for that year. The Board may add further conditions.

Worked example 1: initial superannuation contribution (assumed figures)

Assumptions: an employee has 3 years of past service, annual salary of Rs 6,00,000 in each of those years, and the employer contributed Rs 72,000 a year to a provident fund for him in each year.

Step	Working	Amount
1. 27% of salary, per year	27% of Rs 6,00,000	Rs 1,62,000
2. Less employer PF, per year	Rs 1,62,000 - Rs 72,000	Rs 90,000
3. Cap for 3 years of past service	Rs 90,000 x 3	Rs 2,70,000

If the employer pays Rs 3,00,000 as the initial contribution, the figure within rule 306 is Rs 2,70,000. This only tests rule 306. The fund must also meet the approval requirement in section 29(1)(a).

How is the 14% pension scheme contribution worked out?

Section 29(1)(b) covers an employer's contribution to the pension scheme referred to in section 124. The ceiling is 14% of salary in the tax year, and "salary" for this purpose is narrow: basic pay, plus dearness allowance only if the terms of employment so provide. Other allowances and perquisites are left out. Our guide on NPS and pension contribution deductions covers the employee's side.

Worked example 2: employer pension contribution, tax year 2026-27 (assumed figures)

Assumptions: Meena's monthly pay is basic Rs 40,000, dearness allowance Rs 10,000 (her terms of employment count it as salary) and house rent allowance Rs 20,000. Her employer contributed Rs 90,000 to the notified pension scheme in the year.

Step	Working	Amount
1. Salary for section 29(1)(b)	(Rs 40,000 + Rs 10,000) x 12. HRA excluded	Rs 6,00,000
2. Ceiling at 14%	14% of Rs 6,00,000	Rs 84,000
3. Contribution paid		Rs 90,000
4. Deductible under 29(1)(b)	Lower of Rs 90,000 and Rs 84,000	Rs 84,000

The Rs 6,000 above the ceiling is not covered by clause (b). Section 29(3) says a contribution to a fund outside clauses (a), (b) and (c), or what another law requires, gets no deduction.

Can an employer claim a deduction for a gratuity provision?

Only in the situations section 29 names. Under section 29(1)(d), a provision is deductible when it is made for contribution to an approved gratuity fund, or for gratuity that has become payable during the tax year. Section 29(2)(a) says that, subject to clause (1)(d), a provision for gratuity on retirement or termination is not deductible. Section 29(2)(b) adds that if a deduction was allowed on a provision under clause (1)(d), the actual payment out of that provision is not deducted again.

Real-life example: two gratuity situations

Ravi runs a manufacturing unit with 40 staff. In tax year 2026-27, one employee retires and Rs 3,50,000 of gratuity becomes payable to him. Ravi books the provision in the same year, and it falls under clause (1)(d). When he pays the money in the following year, no second deduction is allowed (section 29(2)(b)).

In the same year, Ravi also creates a provision of Rs 5,00,000 for what he expects to owe other employees when they retire in future years. That gratuity has not become payable in the year and is not a contribution to an approved fund. Section 29(2)(a) rules it out.

When is the deduction allowed: the year of payment rule

Section 37(2)(b) lists the employer's contribution to a provident fund, superannuation fund, gratuity fund or any fund for the welfare of employees as a sum allowed only on actual payment, whatever the accounting method. Under section 37(3), if the amount is paid after the end of the tax year but on or before the due date of filing the return under section 263(1) for that year, the deduction is allowed in the year the liability was incurred.

Worked example 3: timing of a March contribution (assumed figures)

Assumptions: Ravi's employer provident fund contribution for March 2027 is Rs 60,000 (tax year 2026-27).

When Ravi pays it	Year of deduction	Reason
By 31 March 2027	2026-27	Paid within the tax year (section 37(1))
After 31 March 2027 but on or before the section 263(1) return due date for 2026-27	2026-27	Section 37(3)
After that return due date	Year of actual payment	Section 37(1)

Section 37(5) stops the same sum from being deducted a second time when it is paid.

What about the amount deducted from the employee's salary?

An employee's own contribution that the employer receives is treated as income of the employer under section 2(49)(o). Section 29(1)(e) allows it as a deduction if the employer credits it to the employee's account in the relevant fund on or before the return due date under section 263(1) for the tax year. Section 37 does not apply to this sum (section 37(6)).

The Finance Act, 2026 substituted clause (e) with effect from 1 April 2026. The earlier text measured the deadline by the due date under the relevant Act, rule, order or contract. The current text uses the return due date under section 263(1).

Real-life example: late deposit of the employee share

Meena's employer holds back Rs 4,800 a month from salaries as the employee share of provident fund. The employer credits March's amounts to the fund after the return due date for that tax year. The employee's contributions are added to the employer's income under section 2(49)(o) and, because the credit missed the section 29(1)(e) deadline, the deduction is not available for that amount.

Flow: is this employer payment deductible?

An amount above the limit falls outside clause (a) or (b). A contribution paid after the section 263(1) due date is allowed in the year it is actually paid (section 37(1)).

Quick reference

Item	Limit or condition	Provision
Initial superannuation contribution	27% of salary per year of past service, less employer PF for that year	Rule 306
Pension scheme contribution	Up to 14% of salary (basic + DA if terms so provide)	Section 29(1)(b)
Gratuity provision	Only if gratuity became payable in the year or for an approved fund	Section 29(1)(d), (2)
Employer contributions (timing)	Tax year of payment, or by the section 263(1) due date	Section 37(2)(b), (3)
Employee share held by employer	Credit to fund on or before section 263(1) due date	Section 29(1)(e)
Any other fund or trust	No deduction unless required by another law	Section 29(3)

What are the common mistakes with employee welfare deductions?

• Counting every allowance as salary for the 14% test. Only basic pay and, if the terms provide, dearness allowance count under section 29(1)(b).
• Claiming a provision for future gratuity. Section 29(2)(a) allows only what section 29(1)(d) permits.
• Deducting twice. If a provision was allowed under section 29(1)(d), the later payment gets no second deduction.
• Paying the employee's share late. Missing the section 263(1) return due date removes the section 29(1)(e) deduction.
• Contributing to an unapproved fund or trust. Section 29(3) disallows it unless another law requires the payment.
• Mixing up the old and new test for the employee share. From 1 April 2026 the deadline is the return due date under section 263(1).

How do CA firms track employer compliance across clients?

For a CA firm, the hard part is chasing evidence: which clients paid March contributions after year end, which gratuity provisions were booked, and which return due dates are close. Finexo's practice management software keeps deadlines and document requests for each client in one place and sends reminders. It does not compute deductions or file returns for you.

Is employee bonus deductible, and when?

Yes, under section 32(a), not section 29: a bonus or commission paid to an employee for services rendered is deductible, but only if the amount would not have been payable to the employee as profits or dividend had it not been paid as bonus or commission. Section 37(2)(d) puts it on the actual-payment basis, so the same timing rule applies as for PF. Section 37(2)(c) does the same for any amount payable in lieu of leave at the employee's credit.

Payment	Deduction section	Timing
Bonus or commission to employee	32(a)	Year of payment, or earlier year if paid by the section 263(1) due date (37(2)(d), 37(3))
Leave encashment payable by employer	Allowable under the Act, timing by 37(2)(c)	Same actual-payment rule
Employer PF / superannuation / gratuity fund contribution	29(1)(a), (c)	37(2)(b), 37(3)

Example: Ravi declares a Rs 1,20,000 staff bonus for tax year 2026-27 but pays it after 31 March 2027. If he pays on or before the section 263(1) due date for 2026-27, it is deducted in 2026-27; if later, in the year he pays it.

Where is this in the Act?

• Section 29: deductions related to employee welfare (clauses (1)(a) to (e), (2), (3))
• Rule 306 of the Income-tax Rules, 2026: initial contributions
• Section 37(2)(b), (3), (5), (6): payment-basis deductions
• Section 2(49)(o): employee contributions as income
• Section 124: pension scheme of the Central Government
• Section 32(a): bonus or commission to employees; section 37(2)(c), (d) for timing
• Section 26: business or profession income; section 263(1): return of income

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.