Allowability of provision/payment of Gratuity in Income Tax and its representation in Form 3CD

 

Gratuity is the amount employees receive as a part of their gross compensation from their employer, according to the Payment of Gratuity Act, 1972.

Section 40A(7) and section 36(1)(V) subjected to provision of Section 43B deals/relates to the allowance and disallowance of provision/payment of gratuity.

Section 40A(7) says that an assessee will not get deduction for provision made for gratuity unless & until it is for contribution to Approved Gratuity Fund or unless the Provision is for Gratuity that has become payable to employees during the year. In short, deduction simply on the basis of provisions is not permissible. Deduction may not be admissible even if it is on the basis of Actuarial Valuation Report.

However any subsequent contribution towards an approved gratuity fund or gratuity payment to an employee from this provision will not be permitted as a tax deduction in the year of such payment.

As per section 36(1)(v) it may be noted that the contribution by an employer to an Approved Gratuity Fund for exclusive benefit of its employees is an allowable deduction. However, this is subject to Section 43B, which permits certain deductions only on a payment basis.

Disallowance of gratuity is reported under Clause 21(e) provision for payment of gratuity not allowable under section 40A(7), The provision made for gratuity is disallowed under section 40A(7) unless it is paid. This clause puts a liability on the auditor to report all these types of provisions. Moreover, the provision for payment to approved gratuity fund, shall not be disclosed under this clause because the same is reported under clause 26.