Deductions related to employee welfare
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 29(1) of Income Tax Act 2025
29(1) The following sums, when paid by the assessee as an employer, shall be allowed as deduction in computing income chargeable under section 26:––
- (a) any contribution paid to a recognised provident fund or an approved superannuation fund, subject to––
- (i) the limits as prescribed for recognising the provident fund or approving the superannuation fund; and
- (ii) the 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 contribution paid to 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 contribution paid to an approved gratuity fund created by the assessee for the exclusive benefit of his employees under an irrevocable trust;
- (d) 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;
- (e)(i) the amount of contribution received from an employee by the assessee 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.
Section 29(2) of Income Tax Act 2025
29(2)(a) For the purposes 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
29(2)(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.
Section 29(3) of Income Tax Act 2025
29(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, 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.
FAQs on Section 29 of Income Tax Act 2025
1. What is Section 29 about?
Section 29 allows employers to claim deductions for certain contributions and payments made towards employee welfare schemes like provident fund, superannuation, pension, and gratuity.
2. Are these deductions linked to income under Section 26?
Yes. The deductions are specifically allowed while computing income referred to in Section 26.
3. Can contributions to a recognised provident fund be claimed as deduction?
Yes, subject to conditions regarding limits and recognition rules under relevant laws.
4. What are the conditions for superannuation fund deductions?
Deductions are allowed if contributions are consistent and structured, as per Board-prescribed conditions.
5. What about contributions to a pension scheme?
Employers can claim up to 14% of an employee’s salary (including DA) as a deduction if paid to a pension scheme under Section 124, provided terms of employment allow.
6. Is contribution to an approved gratuity fund deductible?
Yes, if it’s exclusively for employee benefit under an irrevocable trust.
7. What if an employer makes a provision for future gratuity payments?
Such provisions are allowed only if they relate to gratuity that has become payable during the tax year.
8. Are provisions for gratuity on retirement/termination allowed?
No, such provisions are not deductible under Section 29(2)(a).
9. Is employee contribution received by the employer deductible?
Only if it is credited to the employee’s account in the relevant fund by the “due date” as defined under relevant laws or contracts.
10. How is the ‘due date’ determined for depositing employee contributions?
It is as per the statutory or contractual obligation, not under general expense rules (i.e., Section 37 doesn’t apply).
11. Are all employer contributions to employee-related funds allowed as deductions?
No. Contributions made for setting up/formation of trusts, societies, etc., are not allowed, unless covered under Section 29(1)(a), (b), or (c) or required by other laws.
12. Can an employer claim deduction both on provision and actual payment of gratuity?
No, if deduction is allowed on provision, no further deduction is allowed on actual payment later.
Section 29 ensures that genuine and structured welfare contributions by employers are deductible, while avoiding misuse via unregulated trusts, vague provisions, or delayed payments. It aligns incentives toward employee benefit while preserving tax discipline.
