Clause 31 of the Finance Bill, 2026 proposes an amendment to section 29 of the Income-tax Act, 2025, which governs deductions relating to employee welfare contributions. The amendment seeks to rationalise the due date for claiming deduction of employee contributions by employers, by aligning it with the due date for filing the return of income.
This change addresses long-standing compliance and litigation issues arising from rigid due-date interpretations.
Existing Provisions under Section 29
Employee Contribution Deduction
- Section 29(1)(e)(i) allows deduction of employee contributions received by an employer (to which section 2(49)(o) applies), only if such contributions are credited to the employee’s account in the relevant fund by the due date.
- Section 29(1)(e)(ii) defines “due date” as the date prescribed under:
- Any applicable Act,
- Rules, notifications or orders,
- Standing orders, awards, or contract of service.
Practical Issue
Under the existing framework, any delay beyond the statutory due date under labour or welfare laws resulted in disallowance of deduction, even where:
- The contribution was actually deposited, and
- The deposit was made before filing the return of income.
This resulted in frequent additions during assessments and prolonged litigation.
What Clause 31 Changes
Clause 31 proposes to substitute sub-clause (ii) of section 29(1)(e).
Revised Due Date
For the purposes of section 29(1)(e), the “due date” shall be:
The due date of filing the return of income under section 263(1) of the Income-tax Act, 2025.
Accordingly, employee contributions deposited on or before the return filing due date will qualify for deduction, regardless of the due date prescribed under other laws.
Effective Date and Applicability
- Effective from: 1 April 2026
- Applicable from: Tax year 2026-27 onwards
The amendment is prospective and does not apply to earlier tax years.
Key Implications of the Amendment
1. Reduced Disallowances for Technical Delays
Employers will no longer face automatic disallowance of employee contributions merely due to delays under welfare legislation, provided payment is made before the return filing due date.
2. Certainty and Simplification
The amendment introduces a single, uniform benchmark for deduction eligibility, improving certainty in tax computations and assessments.
3. Lower Litigation Exposure
Given the volume of disputes historically arising from employee contribution disallowances, this amendment is expected to:
- Reduce adjustments during scrutiny,
- Lower appellate litigation,
- Improve ease of compliance.
4. Improved Cash Flow Management
Businesses, particularly MSMEs, gain flexibility in managing short-term cash flows without risking permanent tax disallowance.
Policy Intent
The amendment reflects the Government’s broader objective of:
- Rationalising procedural rigidity,
- Distinguishing substantive non-compliance from technical delay, and
- Reducing avoidable disputes in routine business deductions.
It aligns the treatment of employee contributions with the return-based compliance philosophy adopted in several other deduction provisions.
Conclusion
Clause 31 of the Finance Bill, 2026 brings a significant compliance-friendly reform by redefining the due date for deduction of employee welfare contributions under section 29. From tax year 2026-27 onwards, employers can claim deduction for employee contributions paid up to the due date of filing the return of income, reducing uncertainty and litigation.
The amendment marks a pragmatic shift towards simplicity, certainty, and proportionality in tax administration.
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