Chapter IV - Computation of Total Income
Section 29
Section 29: deductions related to employee welfare
Section 29 lets an employer deduct, as a business expense, the contributions it makes towards its employees' welfare funds - recognised provident funds, approved superannuation funds, approved gratuity funds, and the pension scheme (NPS) referred to in section 124 - along with employee contributions the employer collects and passes on in time.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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; (e) 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, 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 subsection (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.
Introduction
Employer-funded welfare and amounts collected from employees follow different clauses. The Finance Act, 2026 changed the employee-contribution credit deadline in clause (e) to the income-return due date.
Key takeaways
Specified employee-welfare contributions
An employer may deduct qualifying payments to recognised provident, approved superannuation, pension and gratuity arrangements under the section's conditions.
Employee contributions need timely credit
The section addresses amounts received from employees for welfare funds and ties deduction to crediting the amount by the specified due date.
Other funds
Contributions to other funds or trusts are restricted unless they fit a stated statutory allowance or another legal requirement.
What an employer can deduct
Section 29(1) allows the following as deductions in computing income under section 26:
- Contributions towards a recognised provident fund or approved superannuation fund, subject to prescribed limits/conditions for the fund's recognition/approval
- Contributions towards the section 124 pension scheme (NPS) for an employee, up to 14% of the employee's salary for the tax year (salary here includes dearness allowance if the employment terms provide for it, but excludes other allowances/perquisites)
- Contributions towards an approved gratuity fund created for the exclusive benefit of employees under an irrevocable trust
- Provisions made for contribution to an approved gratuity fund, or for gratuity that has become payable during the tax year
- Employee contributions (of the kind referred to in section 2(49)(o)) that the employer credits to the employee's account in the relevant fund on or before the due date for filing the employer's return of income under section 263(1) for that tax year
Restrictions on gratuity provisioning
No deduction is allowed for a general provision made for gratuity payable to employees on retirement/termination, except to the extent specifically permitted under section 29(1)(d) (section 29(2)(a)).
If a deduction has already been allowed for a provision under section 29(1)(d), no further deduction is allowed when the actual payment is later made from that provision (section 29(2)(b)).
General bar on other employee-welfare-fund payments
No deduction is allowed for any sum paid by the employer towards setting up, forming, or contributing to any other fund, trust, company, AOP, BOI, registered society, or other institution for any purpose - except where such payment falls within section 29(1)(a), (b) or (c), or is otherwise required by any other law in force (section 29(3)).
Step-by-step flow for applying Section 29
- 1
Is the assessee claiming as an employer?
- No: Section 29 does not apply.
- Yes: Go to the next step.
- 2
Which contribution or provision is it?
Recognised provident fund or approved superannuation fund (clause (a)); pension scheme under Section 124 up to 14% of salary (clause (b)); approved gratuity fund (clause (c)); provision for approved gratuity fund contribution or gratuity payable during the year (clause (d)); employees' own contributions credited to their accounts (clause (e)).
- 3
For employees' contributions: were they credited to the fund by the due date under Section 263(1)?
- Yes: Deductible under clause (e).
- No: Not deductible under clause (e) for that tax year.
- 4
Is it any other gratuity provision or a payment to some other welfare fund or trust?
Section 29(2) bars deduction for other gratuity provisions, and Section 29(3) bars contributions to other funds or institutions unless covered by clause (a), (b) or (c) or required by another law.
- Yes: Not deductible under this section.
Practical checklist
Do
- Separate employer contributions from employee amounts withheld through payroll.
- For the employee amount, reconcile the fund credit date with the Section 263(1) return due date under the amended clause.
- Track gratuity provisions separately from later payment so a permitted provision is not deducted twice.
Avoid
- Do not use the superseded pre-amendment employee-contribution deadline in the old clause (e).
- Do not claim an ordinary unfunded gratuity provision unless the specific subsection (1)(d) condition applies.
Illustrative example
Worked example: late credit of employees' PF contribution
Hypothetical facts (illustration only, not a real taxpayer): A manufacturing firm deducts employees' provident fund contributions from salary every month. For one month, the deducted amount is deposited only after the due date for filing the return under Section 263(1) for that tax year. The firm also contributes to an approved gratuity fund.
Employer's own contributions
Contributions to the recognised provident fund and approved gratuity fund are covered by clauses (a) and (c).
Employees' contributions
Clause (e) allows the employees' share only if it is credited to the employee's account in the relevant fund on or before the Section 263(1) due date.
The late month
That month's employee contribution was credited after the due date, so it does not qualify under clause (e).
Outcome
- Employer contributions remain deductible, subject to the prescribed conditions.
- The late-deposited employee contribution is not deductible under clause (e); because such employee contributions are within the meaning of income referred to in Section 2(49)(o), timely deposit matters.
Glossary
- Employee contribution
- A welfare-fund amount received from the employee by the employer and subject to Section 29(1)(e)'s credit condition.
- Approved gratuity fund
- A fund satisfying the Act's approval and irrevocable-trust conditions for the relevant employer deduction.
Frequently asked questions
What is the maximum deductible employer contribution to NPS for an employee?
14% of the employee's salary for the tax year, as per section 29(1)(b).
Can an employer deduct a general provision for future gratuity payments?
Only to the extent permitted under section 29(1)(d) - a general, unrestricted gratuity provision is not deductible under section 29(2)(a).
Is a deduction allowed twice - once for the provision and again when gratuity is actually paid?
No - section 29(2)(b) specifically bars a further deduction on actual payment if a deduction was already allowed for the provision.
Does the income-tax deduction deadline change a welfare fund’s payment obligations?
Section 29(1)(e) sets the amended condition for this income-tax deduction by referring to the section 263(1) return due date. It does not, by itself, rewrite payment or other obligations under the law governing the fund.
Need help applying this provision to your situation?
Talk to our tax team about this sectionLast updated 10 October 2026