Section 43B of the Income-tax Act, 1961 (the ‘Act’) allows deduction for certain expenses on actual payment basis. Time frame is the due date of filing of return of income. Clause (b) of Section 43B cover “any sum payable by the assesse as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees”.

Thus, the Section provides for an additional condition regarding payment for deductibility of specified expenses. So, in the first place, the expense needs to be allowable and then it can be deductible on payment basis. If the expense is not allowable, then deduction cannot be claimed merely because the same has been paid. This is also evident from the opening para of Section 43B, which refers to ‘a deduction otherwise allowable’.

While simple reading of the Section suggests that contribution to the aforesaid funds should be tax deductible on payment basis; unfortunately, the law is not that simple and one has to read few other provisions of the Act to understand the tax deductibility of these contributions.

So let’s delve deeper into the other relevant provisions for deductibility of contributions to these funds. In terms of Section 40A(9) of the Act, no deduction is allowed in respect of any sum paid by the assesse as an employer towards the setting up or formation of, or as contribution to any fund, trust, etc. There is an exception for certain payments covered by Section 36 of the Act. In terms of the said clauses, any sum paid* by an employer by way of contribution towards recognised provident fund or an approved superannuation fund or a pension scheme  as referred to in Section 80CCD (NPS) or an approved gratuity fund shall be allowed as deduction while computing employer’s income. Thus, what initially appeared to be a simple deduction for any contribution to these funds, now turns out to be allowable only if these funds are either recognised or approved. NPS has been a recent addition to this, for which any such specific requirement has not been specified.

* In terms of Section 43(2) of the Act, the term ‘paid’ means actually paid or incurred according to the method of accounting on the basis of which profits are computed. Thus, while accrual of contributions to these funds as per accounting method could have been deductible, given that Section 43B starts with a non-obstante provision, the actual payment becomes necessary.

Here, it would be pertinent to note that there is a requirement that the provident fund should be ‘recognised’ and superannuation and gratuity funds need to be ‘approved’. In this context, ‘recognised’ or ‘approved’ fund means a fund, which has been and continues to be recognised or approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner of Income-tax, in accordance with the prescribed rules. In this regard, it should be noted that Indian courts have allowed deduction in respect of contributions to the funds pending approval from the Chief Commissioner/Commissioner, on the basis that the assessee had filed an application for approval along with the requisite documentation and the approval process was not pending due to assessee’s fault.

In terms of the aforesaid rules, one of the significant conditions for recognition/approval of these funds is that it should be established as an irrevocable trust. Further, in case of superannuation and gratuity finds, there is a requirement that at least 90 per cent employees should be employed in India. In respect of recognised provident fund, the requirement is that all employees should be employed in India or should be employed by an employer whose principal place of business is in India. There are also requirements for withholding due taxes from payments to employees out of these funds.

In respect of gratuity or superannuation fund, there is a possibility that the fund may be established in any year and as such, there are provisions that enable contribution for past services of the employees. In case of provident fund, there is a possibility of transferring balances to the credit of each employee in existing fund to the recognized provident fund, on the date of recognition. In such case, the taxation would be limited to the amount that would be liable to be taxed, as per rules applicable to the recognized provident fund. Further, maximum limits for employer contributions have also been specified on the annual contributions in case of gratuity or superannuation fund, whereas the contributions in excess of specified limit are taxable in the hands of employee in case of provident fund.

Finally, it is also necessary to consider the provisions of Section 40(a)(iv) of the Act, in terms of which the payments to above funds shall be eligible for deduction only if there is an effective arrangement to secure and deduct tax at source from any payments made from the funds.

While the deductibility of employer’s contribution to these funds has been discussed throughout, there has been a considerable judicial debate on the taxability of employees’ contribution to the provident fund. In terms of section 2(24)(x), amount received by the employer by way of contributions from employees towards provident fund is liable to tax as its income. Section 36(1)(va) permits deduction in respect of such employees’ contribution to provide fund, if the same is deposited with the provident fund within due date. The courts have in certain cases permitted deduction in respect of such contributions beyond the due date by making a reference to the provisions of section 43B (applicable in respect of employer’s contribution), if the payments were made prior to the due date of filing return of income. 

In nutshell, these funds provide tax benefits to both employers and employees subject to fulfilment of prescribed conditions.