Classify the obligation before computing any add-back
For FY 2025–26 and AY 2026–27 use the Income-tax Act, 1961. Section 40A(7)(a) generally disallows a provision for payment of gratuity on retirement or termination. Section 40A(7)(b) excepts provisions for contribution to an approved gratuity fund or for gratuity that became payable during the previous year. An exception from the provision bar does not by itself satisfy all deduction requirements. Separate future actuarial amounts, direct employee gratuity that crystallised, and employer contributions to a fund.
Read the applicable text: Income-tax Act, 1961, sections 36(1)(v), 40A(7) and 43B CBDT Form 3CD, clauses 21 and 26 Notified ITR-6, AY 2026–27 ITR-6 corrigendum CBDT ITR-6 validations and Form 3CD mapping CBDT Circular 7/2026 Official AY utilities and schema.
Trace approved-fund contributions to actual payment
Under section 36(1)(v), verify that the employer created the approved gratuity fund under an irrevocable trust for the exclusive benefit of its employees. Section 43B(b) applies to otherwise allowable employer contributions and generally requires actual payment, with the first proviso for payment on or before the applicable section 139(1) return due date and supporting evidence. Check the actual remittance and fund receipt; an internal transfer to an earmarked ledger is not proof. A direct employee payment is not an employer contribution to a fund merely because it is labelled gratuity.
Reconcile actuarial and tax records by component
Use the valuation report to explain the book provision, not to decide the tax allowance. Separate P&L amounts, amounts recorded elsewhere, current employee liabilities, direct payments, employer contributions and amounts already deducted in prior years. Identify prior disallowances by legal ground. The Explanation to section 40A(7) prevents a further deduction for payment out of a provision already allowed. A payment against a disallowed provision still needs an independent entitlement analysis.
Tie the clause and schedule to the reason
Form 3CD clause 21(e) reports gratuity provision disallowed under section 40A(7), mapped by CBDT's AY validation annexure to Part A-OI 9(c). OI 9(f) feeds Schedule BP item 17. The otherwise allowable employer contribution disallowed under section 43B is tracked under Form 3CD clause 26 and Part A-OI 11(b) for the relevant current P&L amount; OI 11(i) flows to BP item 18. A qualifying prior section 43B disallowance now allowable is tracked at OI 10(b), with OI 10(i) flowing to BP item 31. Do not send a prior section 40A(7) disallowance to that section 43B line merely because it was subsequently paid.
Set the company due date and review the roll-forward
For the covered serial-number 2 class, Circular 7/2026 extended the AY return due date from 31 October to 21 November 2026 and the specified audit report from 30 September to 21 October 2026. The separate section 92E class has a statutory 30 November return due date; use the applicable return date for the section 43B test. Verify any later relevant relief and retain approved fund, employee and payment evidence. Use the AY utility and reconcile Form 3CD disclosures to a single signed tax computation.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Pure actuarial provision
An Indian company debits ₹8 lakh for future gratuity and establishes no section 40A(7)(b) exception. Its supported add-back is ₹8 lakh, with no current deduction for that provision.
Illustrative example 2: Direct amount crystallised this year
Of ₹6 lakh booked, ₹1.5 lakh is established as gratuity payable to departing employees during the year and is otherwise deductible on the assumed facts. The ₹4.5 lakh residual future provision is disallowed under section 40A(7).
Illustrative example 3: Approved contribution paid by due date
A company in the covered serial-number 2 class books an otherwise allowable ₹4 lakh approved-fund contribution, and pays the entire amount on 10 November 2026 with evidence. It pays 11 calendar days before the 21 November return due date; no section 43B disallowance remains for this contribution.
Illustrative example 4: Split payment dates
An otherwise allowable ₹5 lakh contribution is debited. ₹3 lakh is paid by the applicable return due date and ₹2 lakh after it. Subject to the assumed evidence, ₹2 lakh is disallowed in the current computation and separately tracked for the payment year.
Illustrative example 5: Prior section 43B amount paid
Of a ₹2.8 lakh opening pool of prior section 43B disallowances, ₹2.4 lakh is now paid and ₹0.4 lakh remains unpaid. The supported payment-year allowance is ₹2.4 lakh and ₹0.4 lakh remains tracked; assume no duplicate current debit or prior allowance.
Illustrative example 6: One expense, one add-back
The P&L includes ₹3.2 lakh future provision and ₹1.8 lakh otherwise allowable fund contribution not paid by the deadline. Assign ₹3.2 lakh to the section 40A(7) route and ₹1.8 lakh to section 43B. Total add-back is ₹5 lakh, not ₹6.8 lakh from duplicating the fund amount.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Reconcile the employee benefit ledger | Actuarial report and account movement |
| 2 | Identify crystallised employee dues | Exit records and payable evidence |
| 3 | Identify the employer fund obligation | Fund approval and contribution working |
| 4 | Check deduction conditions | Statutory entitlement and plan terms |
| 5 | Trace payment | Bank evidence and fund receipt |
| 6 | Apply the right return date | Section 139 class and circular |
| 7 | Measure each disallowance once | Transaction-level tax adjustments |
| 8 | Tie tax audit to ITR-6 | Clause 21(e), clause 26 and OI fields |
| 9 | Verify prior-year movements | Filed computation and payment evidence |
| 10 | Approve the final bridge | Schedule BP and closing disallowance register |
Sixteen practitioner FAQs
1. Does an actuarial valuation create a tax deduction?
No. Apply the statutory tests separately from financial reporting.
2. Which rule bars a future gratuity provision?
Section 40A(7)(a), subject to the exceptions in that subsection.
3. Does the exception cover current employee dues?
It can apply to gratuity that became payable during the previous year; verify facts and other conditions.
4. What if the fund approval is missing?
Verify approval and the deduction route before claiming the contribution.
5. Is a company bank account transfer actual fund payment?
Trace actual remittance to the approved fund.
6. Which due date matters for the section 43B proviso?
The applicable section 139(1) return due date, subject to its evidence requirement.
7. What if part is paid after the due date?
Separate paid and unpaid portions and assess deduction in the actual payment year.
8. Which tax-audit clause covers a disallowed gratuity provision?
Form 3CD clause 21(e).
9. Which ITR-6 field takes that disallowance?
Part A-OI 9(c), through 9(f) to Schedule BP item 17.
10. Which field covers a disallowed current employer contribution?
For the relevant P&L amount, OI 11(b) through 11(i) to BP item 18.
11. What if a prior section 43B contribution becomes allowable?
Use the prior-disallowance reconciliation and OI 10(b) where applicable.
12. Can the same amount appear as two add-backs?
No. Identify the operative ground and remove duplication.
13. Can direct gratuity be treated as a fund contribution?
Not unless the facts establish a qualifying contribution.
14. Can a previously allowed provision produce a second deduction on payment?
Section 40A(7)'s explanation prevents duplicate deduction for payment out of that allowed provision.
15. Does a balance-sheet accrual always feed BP?
Check whether it affected the starting profit and how it enters the computation.
16. What supports the closing balance?
Component-level movement, prior treatment and payment records.
Official sources
Income-tax Act, 1961, sections 36(1)(v), 40A(7) and 43B CBDT Form 3CD, clauses 21 and 26 Notified ITR-6, AY 2026–27 ITR-6 corrigendum CBDT ITR-6 validations and Form 3CD mapping CBDT Circular 7/2026 Official AY utilities and schema