Employee Contribution to Welfare Funds –
From Judicial Conflict to Legislative Reversal

Statutory Background

Employee contribution to welfare funds such as Provident Fund and ESI has historically been governed by Section 36(1)(va) read with Section 2(24)(x) of the Income-tax Act, 1961, now corresponding to Section 29(e) of the Income-tax Act, 2025.

Section 36(1)(va) permitted deduction of employees' contribution only if such sum, treated as income under Section 2(24)(x), was credited to the relevant fund on or before the "due date." The Explanation to the section defined "due date" as the date by which the employer is required to deposit the contribution under the relevant labour welfare law, contract of service, or standing order.

The statutory scheme clearly distinguished between:
Employer's contribution, governed by Section 43B, and
Employees' contribution, governed by Section 36(1)(va).

Era of Conflicting Judicial Views

Despite the express language of the statute, divergent judicial interpretations arose.

Several High Courts took a liberal view, allowing deduction of employees' contribution if the payment was made before the due date of filing the return under Section 139(1), by applying the rationale of Section 43B. Conversely, other High Courts held that employees' contribution constituted a fiduciary receipt and that any delay beyond the due date under the respective welfare laws resulted in permanent disallowance.

Finance Act, 2021 – Legislative Clarification

To reinforce the legislative intent and put an end to the controversy, the Finance Act, 2021 inserted an Explanation to Section 36(1)(va), clarifying that:

"The provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the 'due date' under this clause."

Supreme Court Ruling – Checkmate Services (P.) Ltd.

The controversy was conclusively settled by the Hon'ble Supreme Court in Checkmate Services (P.) Ltd. vs. CIT-1 [2022] 448 ITR 518 (SC). The Apex Court held that: Employees' contribution is income in the hands of the employer under Section 2(24)(x).

• Deduction under Section 36(1)(va) is conditional and time-bound, linked strictly to the due date prescribed under the relevant welfare legislation.
• Section 43B applies only to employer's contribution and cannot be invoked to relax the timelines for employees' contribution.
• Treating employees' contribution at par with employer's contribution would defeat the legislative intent and render Section 36(1)(va) redundant.

Accordingly, the Court held that deposit of employees' contribution beyond the statutory due date under welfare laws is not allowable as a deduction, even if paid before the return filing date.

The judgement was expressly stated to be clarificatory in nature, thereby aligning the Supreme Court's interpretation with legislative intent and signaling finality on the issue.

A Settled Position—Briefly

Post Finance Act, 2021 and Checkmate Services judgement, the legal position appeared unequivocal:

• Employees' contribution had to be deposited within the due date prescribed under the relevant labour law.
• Failure resulted in permanent disallowance, irrespective of the return filing date.
• Section 43B relief was confined strictly to employer's contribution.

Finance Bill, 2026 – Legislative Reversal under ITA, 2025

The Finance Bill, 2026 has, however, reversed this settled position.

Under Section 29(e) of the Income-tax Act, 2025, deduction of employees' contribution to welfare funds is now allowed if the amount is deposited on or before the due date of filing the return of income under the Act, even if the deposit is made after the due date prescribed under the respective welfare legislations.

This amendment effectively undoes the clarification introduced by the Finance Act, 2021 and reintroduces return-filing-date based relief for employees' contribution, thereby restoring parity between employer's and employees' contribution for income-tax purposes.

Implications and Policy Shift

The amendment represents a conscious policy departure from both judicial interpretation and earlier legislative intent. While the Supreme Court had emphasised the fiduciary character of employees' contributions, the new shift prioritises ease of compliance and reduction of mechanical disallowances.