Sections 34 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.
Sections 34 and 35 of the Code on Wages, 2019 list what is taken off gross profits, as "prior charges", before the available surplus is known: depreciation, direct tax, and further sums prescribed by the Central Government. Section 35 then lays down how the direct tax is to be calculated for this purpose, which is not the tax actually assessed.
Three items are deducted from gross profits as prior charges: (a) depreciation admissible under the Income-tax Act or the agricultural income-tax law; (b) direct tax payable for the accounting year, calculated under s.35; and (c) further sums prescribed by the Central Government (s.34), which the Central Rules set out in Appendix D (rule 26). The direct tax is calculated at the rates applicable to the employer's income for that year, ignoring carried-forward losses and arrears of depreciation, and treating individuals, HUFs, charities and export profits in the special ways listed in s.35(a) to (e).
Section 34: the three prior charges
| Clause | Deduction from gross profits |
|---|---|
| (a) | Any amount by way of depreciation admissible under sub-section (1) of section 32 of the Income-tax Act, or under the agricultural income-tax law in force, as the case may be |
| (b) | Subject to s.35, any direct tax the employer is liable to pay for the accounting year on his income, profits and gains during that year |
| (c) | Such further sums in respect of the employer as may be prescribed by the Central Government |
The Income-tax Act, 1961 has been replaced by the Income-tax Act, 2025 from 1 April 2026. The Code text, as enacted, cites the 1961 Act; this article does not give new section numbers. See our income-tax guides on depreciation.
Clause (a) is depreciation admissible under the tax law, not the depreciation the employer chose to book. Clause (b) is tax the employer is liable to pay, and s.35 says how that is worked out for bonus. The result of s.34 feeds section 33: available surplus is gross profits after these deductions.
To see how the three prior charges work for a particular employer, a working paper is useful. Our payroll compliance audit service prepares and reviews bonus workings, including the deductions below.
Clause (c) and Appendix D (rule 26)
What the Central Rules add. The Code on Wages (Central) Rules, 2026 (G.S.R. 343(E), 8 May 2026) apply only where the Central Government is the appropriate Government. Where the State Government is the appropriate Government, the State's own wage rules apply. Rule 26 says that the further sums specified in respect of the employer in Appendix D shall be deducted as prior charges under clause (c) of s.34. Appendix D sets them by category of employer.
| Employer | Further sums deducted (summary of Appendix D) |
|---|---|
| Company other than a banking company | (i) dividends on preference share capital at the actual rate; (ii) 8.5 per cent of paid-up equity share capital at the start of the year; (iii) 6 per cent of reserves at the start of the year including profits carried forward. A foreign company uses a different base: 8.5 per cent of net fixed assets plus current assets in India less current liabilities (with a head-office carve-out) |
| Banking company | (i) preference dividends; (ii) 7.5 per cent of paid-up equity capital; (iii) 5 per cent of reserves; (iv) the higher of the transfers to the statutory reserve fund or to reserves in India as directed by the Reserve Bank. A foreign banking company uses working-funds proportions |
| Corporation | 8.5 per cent of paid-up capital and 6 per cent of reserves |
| Co-operative society | 8.5 per cent of capital invested in the establishment, plus sums carried to a statutory reserve fund |
| Any other employer | 8.5 per cent of capital invested in the establishment; with additions for firms (up to 25 per cent of gross profits after depreciation for partners' remuneration, with a Rs 5 lakh per partner limit) and for individuals and HUFs (the lesser of 25 per cent of gross profits after depreciation or Rs 5 lakh as the employer's remuneration) |
The Explanation to Appendix D says that "reserves" excludes amounts set apart for direct tax payable per the balance sheet, depreciation admissible under s.34(a), and declared dividends, but includes extra amounts set apart for specific tax reserves and depreciation above the admissible amount. Because Appendix D has provisos and special cases, read the Rules text for your employer category before computing.
Hypothetical example (company other than a banking company). Paid-up equity capital at the start of the year: Rs 1,00,00,000. Reserves: Rs 50,00,000. Preference dividend: Rs 2,00,000. The further sums are: preference dividend Rs 2,00,000 + 8.5% of Rs 1,00,00,000 = Rs 8,50,000 + 6% of Rs 50,00,000 = Rs 3,00,000, a total of Rs 13,50,000. The figures are invented only to show the arithmetic.
See Rules 24 to 26 and the Appendices A to D.
Section 35: how the direct tax is calculated
Any direct tax payable by the employer for an accounting year, for the Code's purposes, is calculated at the rates applicable to the income of the employer for that year, subject to these provisions:
| Clause | Rule for the notional tax |
|---|---|
| (a)(i) | No account of any loss of a previous accounting year carried forward under direct tax law |
| (a)(ii) | No account of arrears of depreciation that the employer may add to the allowance for a later year |
| (b) | A religious or charitable institution to which section 41 does not apply, whose income is wholly or partly exempt from tax, is treated for the exempted income as if it were a company in which the public are substantially interested |
| (c) | An individual or Hindu undivided family: tax is calculated on the basis that the income from the establishment is his only income |
| (d) | Export profits rebate allowed under direct tax law: no account of the rebate |
| (e) | No account of any rebate other than development rebate, investment allowance or development allowance, or credit, relief or deduction (not mentioned above) allowed for the development of any industry |
Clause (a) means that a carried-forward loss does not reduce the notional tax, so a company with accumulated losses still has a notional tax deducted. Clause (c) stops an individual owner's other income from changing the result. Clause (e) is drafted as a double negative: it says no account is taken of any rebate "other than" certain named ones, and then of credits, relief or deduction "not hereinbefore mentioned" for industry development. Read it with the clause (d) export rule, and take advice if your tax position includes such items.
The same notional tax is used in the proviso to section 33, which compares tax on gross profits with and without the bonus. See also section 41 for the institutions outside the Chapter.
Need help with prior charges and notional tax?
Notional tax under s.35 differs from the tax return, and Appendix D varies by employer category. Our payroll compliance audit team can build the working, show each deduction and keep it ready for any bonus dispute.
Key takeaways
- Gross profits are reduced by three prior charges: depreciation, direct tax and further sums prescribed by the Central Government.
- Appendix D lists the further sums by employer category, with percentages of capital and reserves.
- Direct tax for bonus is notional, calculated at the year's rates, ignoring carried-forward losses and arrears of depreciation.
- Individuals and HUFs are taxed as if the establishment income is their only income.
- Charities with exempt income are treated as companies in which the public are substantially interested.
Read next
- Sections 32 and 33: computation of gross profits and available surplus
- Section 36: set on and set off of allocable surplus
- Rules 24 to 26 of the Central Rules: computation of gross profits and further deductions
- Calculation of bonus: the allocable surplus method
Disclaimer: Based on the Code on Wages, 2019 (as enacted) and, where noted, the Code on Wages (Central) Rules, 2026 (G.S.R. 343(E), 8 May 2026), as on 1 October 2026. The Code is in force from 21 November 2025; State Governments make their own rules for establishments where the State is the appropriate Government, and wage rates are notified separately. Verify the current position before acting.