Section 29 allows employers to deduct contributions to provident funds, NPS, and gratuity funds from business income — subject to fund approval, actual payment, and prescribed limits. Employee contributions collected but not deposited on time are taxed as employer's business income.
Last updated: 9 July 2026
Section 29 of the IT Act 2025 allows an employer to deduct certain employee welfare expenditure from business income. It covers four distinct types of contributions, each governed by its own sub-section:
| Sub-section | Contribution Type |
|---|---|
| 29(1)(a) / (c) | Employer → Provident Fund / Superannuation / Gratuity Fund (approved) |
| 29(1)(b) | Employer → National Pension System (NPS) |
| 29(1)(d) | Employer → Approved Gratuity Fund (including crystallised provisions) |
| 29(1)(e) | Employee contributions collected by employer — late deposit consequences |
| 29(3) | General bar on fund-creation contributions |
Employer contributions are deductible only when two conditions are met: the fund must be approved/recognised, and the amount must have been actually paid during the year.
The 'actually paid' condition is hard. Contributions accrued in the books but not deposited to the fund by the ITR due date are disallowed — even if the employer has made a provision.
Employer contributions to the National Pension System are deductible at the lower of two amounts:
| Limit | Amount |
|---|---|
| a. 14% of Basic Salary + DA (as per employment terms) | ↓ |
| b. Actual contribution made | Lower of (a) and (b) |
Important upgrade from IT Act 1961: private-sector employers were capped at 10% of Basic + DA under old Section 36(1)(iva). IT Act 2025 raises this to 14% for all employers — matching the rate previously available only to government employers. Review your NPS contribution policy accordingly.
Crystallisation occurs when the employee completes the minimum qualifying service (typically 5 years) and the gratuity liability becomes legally enforceable. A provision made in anticipation — before crystallisation — does not qualify.
When an employer deducts the employee's share of PF, superannuation, or gratuity contributions from salary, those amounts belong to the employees — not the employer. Section 29(1)(e) creates a strict consequence for late deposit:
| Situation | Tax Treatment |
|---|---|
| Deposited on or before ITR due date under Section 263(1) | Deductible — no issue |
| Not deposited by ITR due date | Deemed as employer's PGBP income under Section 2(49)(o) — taxed in full |
There is no grace period. If the employer collects ₹5 lakh as employee PF contributions but fails to deposit it before the ITR due date, the entire ₹5 lakh is added back as taxable business income of the employer under Section 2(49)(o).
No deduction is allowed for employer contributions made to set up or fund any fund, trust, or institution — unless the contribution is specifically permitted under the IT Act 2025 or any other applicable law.
This provision prevents employers from creating informal welfare pools or arbitrary trusts and claiming deductions. Only contributions to legally recognised structures (SPF, RPF, NPS, approved gratuity fund) survive this filter.
| Sub-section | Type | Deduction Rule |
|---|---|---|
| 29(1)(a)/(c) | Approved PF / Superannuation / Gratuity Fund | Full amount — must be actually paid; unapproved funds disallowed |
| 29(1)(b) | NPS (employer share) | Lower of 14% of Basic+DA or actual contribution; must be actually paid |
| 29(1)(d) | Gratuity fund provision | Allowed if crystallised or to approved fund; no double deduction on actual payment |
| 29(1)(e) | Employee contributions received | Deposit by ITR due date or entire amount becomes employer's PGBP income |
| 29(3) | Fund / trust setup contributions | No deduction unless specifically authorised by law |
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