Deductions related to employee welfare.

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.

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
• (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.

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.

Explanation

Section Summary:

Section 29(1) of the new income tax law deals with deductions allowed to employers for contributions made towards employee welfare schemes, such as provident funds, superannuation funds, pension schemes, and gratuity funds. The section ensures that employers can claim deductions for these contributions, provided they meet specific conditions and limits. Section 29(2) and 29(3) clarify restrictions on deductions, particularly for provisions made for gratuity payments and contributions to non-qualifying funds or trusts.

Key Changes:

1. Clarification on Employee Contributions: The section explicitly states that employee contributions must be credited to the relevant fund by the "due date" to qualify for deductions. This is a stricter compliance requirement compared to earlier provisions.
2. Gratuity Provisions: Section 29(2) introduces a restriction on deductions for provisions made for gratuity payments. If a deduction is claimed for a provision, no further deduction is allowed when the actual payment is made.
3. Exclusion of Non-Qualifying Funds: Section 29(3) explicitly disallows deductions for contributions to funds, trusts, or institutions unless they fall under the specific categories mentioned in Section 29(1)(a), (b), or (c), or are mandated by other laws.

Practical Implications:

1. For Employers: Employers must ensure timely crediting of employee contributions to provident funds, superannuation funds, or pension schemes to claim deductions. Delayed contributions may lead to disallowance of deductions.
2. Gratuity Management: Employers need to carefully manage gratuity provisions and payments. If a provision is made and a deduction claimed, no further deduction can be claimed when the actual payment is made.
3. Compliance with Fund Rules: Contributions to employee welfare funds must comply with the prescribed limits and conditions. Non-compliance can result in disallowed deductions.
4. Exclusion of Non-Qualifying Contributions: Employers cannot claim deductions for contributions to funds or trusts that do not fall under the approved categories, unless required by law.

Critical Concepts:

1. Due Date: The date by which employee contributions must be credited to the relevant fund, as per applicable laws, rules, or employment contracts.
2. Approved Funds: Only contributions to recognised provident funds, approved superannuation funds, and approved gratuity funds qualify for deductions.
3. Gratuity Provisions: Employers can claim deductions for provisions made for gratuity payments, but no deduction is allowed for actual payments if a provision has already been claimed.

Compliance Steps:

1. Timely Contributions: Ensure employee contributions are credited to the relevant funds by the due date.
2. Documentation: Maintain records of contributions made to provident funds, superannuation funds, pension schemes, and gratuity funds.
3. Avoid Double Deductions: Do not claim deductions for both provisions and actual payments of gratuity.
4. Verify Fund Approvals: Ensure contributions are made only to approved funds or schemes as per Section 29(1).

Examples:

1. Employee Contribution Scenario: An employer deducts ₹10,000 from an employee’s salary for the provident fund in March 2024 but credits it to the fund in April 2024. Since the contribution was not credited by the due date (March 2024), the employer cannot claim a deduction for this amount.
2. Gratuity Provision Scenario: An employer sets aside ₹5 lakh as a provision for gratuity in FY 2023-24 and claims a deduction. In FY 2024-25, the employer pays ₹5 lakh as gratuity to an employee. No deduction can be claimed for the actual payment since the provision was already deducted in the previous year.
3. Non-Qualifying Fund Scenario: An employer contributes ₹2 lakh to a non-approved trust for employee welfare. This contribution is not deductible under Section 29(3) unless it is mandated by another law.