Identify a contribution before claiming the expense
For FY 2025–26 and AY 2026–27, section 40A(9) of the Income-tax Act, 1961 restricts amounts paid as an employer to set up, form or contribute to a fund, trust, company, association, society or other specified institution. This includes associations of persons, bodies of individuals and societies registered under the Societies Registration Act, 1860. Test the actual payee and legal purpose. An employee-welfare objective alone does not make a voluntary payment to an institution deductible.
Read the applicable text: Income-tax Act, 1961, section 40A(7), (9) and (10) Income-tax Department: section 43B, employer contribution payment timing Income-tax Department: Items reportable in Form 3CD, clause 21(f)
Test the exceptions and their extent
The rule excepts sums paid for the purposes and to the extent provided by or under section 36(1)(iv), (iva) or (v), or as required by or under another law in force. The referenced clauses cover contributions to recognised provident or approved superannuation funds under clause (iv), the pension scheme referred to in section 80CCD under clause (iva), and approved gratuity funds meeting clause (v). Apply the conditions and limits for the specific payment. Retain recognition or approval, scheme terms, the applicable payroll base and evidence of any statutory mandate. Exclude amounts beyond the supported exception. An otherwise eligible contribution still needs its own deduction and timing review, including the actual-payment rule in section 43B(b) and any applicable first-proviso relief. Payment timing does not make an otherwise inadmissible contribution deductible. The historical relief in section 40A(10) concerns qualifying expenditure before 1 March 1984 and does not create a general current-year exception.
Distinguish direct cost from institutional funding
A vendor invoice for welfare services consumed by employees may be a different transaction from a contribution to an institution. Obtain the actual contracts, invoices, recipients and fund documents before classifying it. Direct expenditure is not automatically deductible either; apply the relevant business deduction and disallowance rules. Separately classify employee deductions remitted by the employer and unpaid provisions; employee contributions require a separate review under sections 2(24)(x) and 36(1)(va), and an unpaid provision is not itself a sum paid for section 40A(9).
Reconcile the tax-audit and computation figures
For applicable tax audits, Form 3CD clause 21(f) captures amounts inadmissible under section 40A(9). Keep this distinct from clause 21(e) for inadmissible gratuity provisions under section 40A(7) and clause 26 for applicable section 43B items. For the tax audit for FY 2025–26, the Department confirms that the existing Form 3CA or 3CB and Form 3CD continue to apply. The separate Form 26 applies for Tax Year 2026–27 under the new Act and should not be substituted here. Reconcile the reported amount with the book profit starting point and reverse a charge only once. Track amounts not debited in the current profit and loss and any earlier adjustment separately.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Voluntary trust contribution
The company pays and expenses ₹8 lakh to a discretionary welfare trust with no established exception. On these facts the section 40A(9) adjustment is ₹8 lakh.
Illustrative example 2: Supported and excess amounts
A ₹12 lakh expensed contribution includes ₹9 lakh within a verified section 36 exception. The excess of ₹3 lakh fails the stated exception; review the ₹9 lakh under other conditions separately.
Illustrative example 3: Direct service and contribution
An expense account contains ₹5 lakh of direct contracted welfare services and ₹4 lakh paid to an unqualified institution as a contribution. The section 40A(9) working identifies ₹4 lakh; the ₹5 lakh requires its own review.
Illustrative example 4: Two payment purposes
A ₹10 lakh payment includes ₹6 lakh proved required under another law and ₹4 lakh of voluntary top-up with no other exception. The restricted amount under this test is ₹4 lakh.
Illustrative example 5: Prior debit already reversed
A ₹7 lakh provision was expensed and added back in a verified earlier computation. Assume the underlying contribution paid this year is inadmissible under section 40A(9). This year’s ₹7 lakh payment merely clears the liability. The current profit and loss reversal for that payment is nil; confirm the audit disclosure separately.
Illustrative example 6: Employer and employee portions
A remittance of ₹11 lakh includes ₹8 lakh of employer contribution and ₹3 lakh collected from employees. Reconcile the two amounts separately; ₹8 lakh is the population to test as the employer contribution on those facts.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Classify the payment | Employer contribution, formation funding or direct expense. |
| 2 | Identify the recipient | Trust deed, fund status and bank records. |
| 3 | Verify actual payment | Date, amount and ledger allocation. |
| 4 | Map statutory exceptions | Applicable section 36 clause or other legal mandate. |
| 5 | Quantify permitted extent | Approval terms and supported payroll or contribution working. |
| 6 | Screen other restrictions | Payment timing and independent statutory conditions. |
| 7 | Separate payroll deductions | Employer and employee portions reconciled. |
| 8 | Reconcile to profit and loss | Current expense, provision and earlier adjustments. |
| 9 | Prepare audit disclosure | Clause 21(f) support and separate provision/timing records. |
| 10 | Approve the computation | Signed reconciliation with no duplicate adjustment. |
Sixteen practitioner FAQs
1. Does a welfare purpose qualify on its own?
No. Test the transaction and statutory exceptions.
2. Does the rule cover forming a fund?
Yes, payments for setting up or formation are within its stated scope.
3. Is recipient registration alone sufficient?
No. Prove the relevant exception and its extent.
4. Which section 36 clauses are referenced?
Section 36(1)(iv), (iva) and (v).
5. Can a mandatory payment under another law qualify?
Yes, to the extent established by or under that law.
6. Does a Board policy itself establish a statutory requirement?
No. Identify the underlying law, if any.
7. Can a voluntary top-up share an exception automatically?
Review its legal basis and permitted extent separately.
8. Is direct staff medical expenditure necessarily a fund contribution?
No. Identify the actual payment and arrangement.
9. Are payroll deductions the same as employer contributions?
No. Classify and test them separately.
10. Does an exception settle payment timing?
No. Check the applicable deduction conditions and section 43B where relevant.
11. Is section 40A(10) general relief for current welfare spending?
No. It is tied to qualifying historical expenditure.
12. Which Form 3CD clause applies to the restriction?
Clause 21(f), where the audit reporting requirement applies.
13. Is a gratuity provision the same reporting item?
No. Distinguish section 40A(7) and its reporting route.
14. Can the bank remittance total be copied directly?
No. Break it into components and reconcile actual book treatment.
15. What if a prior-year add-back already exists?
Check the previous computation and avoid adding the same charge twice.
16. Which enactment governs these examples?
The Income-tax Act, 1961 for FY 2025–26 and AY 2026–27.
Sources
- Income-tax Act, 1961, section 40A(7), (9) and (10)
- Income-tax Act, 1961, consolidated text, including sections 36, 40A and 43B
- Income-tax Department: section 43B, employer contribution payment timing
- Income-tax Department: Items reportable in Form 3CD, clause 21(f)
- Income Tax e-filing guidance: AY 2026–27 tax audit forms and transition