Section 29 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 29 allows an employer to deduct certain contributions and provisions for employee welfare when computing business income under section 26. This is the section as per the Income-tax Act, 2025 as amended by the Finance Act, 2026; clause (e), on employee contributions, was substituted with effect from 1 April 2026.
An employer can deduct contributions to a recognised provident fund or approved superannuation fund, contributions to the pension scheme in section 124 up to 14% of the employee's salary (with the stated meaning of salary), contributions to an approved gratuity fund, and a gratuity provision in the limited cases of clause (d). Employee contributions to the relevant funds are deductible if credited to the employee's account on or before the due date of filing the return under section 263(1) for the tax year. Section 29(3) bars other contributions to funds and institutions unless another law requires them. Later amendments, rules and notifications should be checked.
How section 29 fits
Section 29 sits in the business-income part of Chapter IV, and the deductions it allows flow into the return you file through income tax return filing. The charge on business income arises under section 26; the general deduction is in section 34, and the other short deduction sections follow in our article on sections 27, 28 and 30. Section 29 applies "in the case of an assessee being an employer" and allows the sums listed "in computing income chargeable under section 26".
Section 29(1): the five deductions
| Clause | Sum allowed | Conditions printed |
|---|---|---|
| (a) | Contribution to a recognised provident fund or an approved superannuation fund | Subject to limits as may be prescribed for recognising the fund or approving the superannuation fund; and conditions as the Board may specify where contributions are not made annually, either as fixed amounts or annual contributions fixed on some definite basis by reference to income under the head "Salaries", the contributions, or the number of members of the fund |
| (b) | Contribution 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 salary includes dearness allowance if the terms of employment so provide, but excludes all other allowances and perquisites |
| (c) | Contribution to an approved gratuity fund | The fund must be created by the assessee for the exclusive benefit of his employees under an irrevocable trust |
| (d) | Provision for making contribution to an approved gratuity fund, or for payment of gratuity that has become payable during the tax year | Irrespective of anything in sub-section (2) |
| (e) | Employee contribution to which section 2(49)(o) applies | Credited by the assessee to the employee's account in the relevant fund or funds, on or before the due date of filing the return of income under section 263(1) for the tax year |
For the pension scheme in clause (b), our article on section 124 explains the employee side and the 14% limit from the employee's point of view. The detail on prescribed limits in clause (a) is left to the Income-tax Rules, 2026; see our rule-wise guides.
Clause (e): what the Finance Act, 2026 changed
Clause (e) was substituted by the Finance Act, 2026, w.e.f. 1-4-2026. Before the substitution, the clause had a separate meaning of "due date" tied to the date set by the law or contract governing the fund, and said section 37 did not apply for finding that date. As it now stands, the clause is one sentence: the amount of contribution received from an employee, to which section 2(49)(o) applies, is allowed if the assessee credits it to the employee's account in the relevant fund or funds on or before the due date of filing the return under section 263(1) for the tax year.
The practical test is therefore the return due date for the tax year, not a payment date set elsewhere. For what the term "due date" means in the return provision, see the article on section 263 and the return of income (that post carries the earlier Act's number in its slug).
Section 29(2): gratuity provisions
Subject to clause (1)(d):
- (a) no deduction is allowed for any provision made for the payment of gratuity to employees on their retirement or termination for any reason; and
- (b) where a deduction has been allowed for a provision under clause (1)(d), no deduction is allowed on actual payment made from that provision.
So a general provision for future gratuity is not deductible; only the provision falling within clause (1)(d) is, and it is not deducted a second time when paid.
Section 29(3): other funds and institutions
No deduction is allowed for 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 the sum is paid for the purposes and to the extent provided by or under sub-section (1)(a), (b) or (c), or as required by or under any other law in force. The 1860 Act is quoted as printed; check it for its own provisions.
Worked example
The names and amounts are assumed. Orion Traders, run as a proprietary business, has an employee whose salary for the tax year (basic and dearness allowance under the terms of employment) is Rs. 6,00,000. The employee also gets a house allowance and a conveyance perquisite, which are not part of "salary" for clause (b).
- The employer pays Rs. 90,000 to the pension scheme in section 124. The limit is 14% of Rs. 6,00,000 = Rs. 84,000.
- Deduction under clause (b): Rs. 84,000. The excess Rs. 6,000 is outside clause (b).
Orion also deducts Rs. 40,000 from the employee's pay as the employee's contribution to the fund. It credits the amount to the employee's account before the due date of filing the return under section 263(1). Clause (e) allows Rs. 40,000. Had it credited the amount after that due date, clause (e) would not apply to it.
Common mistakes
- Applying the 14% limit to a salary that includes allowances. Only dearness allowance (if the terms of employment so provide) counts.
- Deducting a general gratuity provision. Only the cases of clause (1)(d) are covered.
- Giving donations or contributions to a trust that is not within clause (1)(a), (b) or (c) and not required by another law.
- Reading clause (e) by the old payment-date idea instead of the return due date under section 263(1).
Need help with employer deductions?
If you run payroll and want to check that fund contributions, the 14% limit and gratuity provisions are claimed correctly, our books of accounts compliance team can review the records. For the return itself, see income tax return filing.
Key takeaways
- Provident fund, superannuation, pension scheme and gratuity fund contributions are deductible within the limits and conditions printed.
- The pension scheme limit is 14% of salary (dearness allowance, if in the terms of employment; no other allowances or perquisites).
- Employee contributions must be credited on or before the section 263(1) return due date for the tax year (clause (e), substituted w.e.f. 1-4-2026).
- A gratuity provision is deductible only as clause (1)(d) allows.
- Other contributions to funds and institutions are barred unless clause (1)(a), (b) or (c) or another law applies.
Read next
- Section 26: business and professional income
- Sections 27, 28 and 30: business deductions
- Section 34: general business deduction
- Section 37: actual payment basis
- Section 124: NPS deduction
- Chapter IV: computation of total income
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.