Section 36(1)(va) Disallowance on Employees' PF & ESI Contributions: From Prolonged Litigation to Budget 2026 Resolution
The controversy surrounding the deductibility of employees' contributions to Provident Fund (PF) and Employees' State Insurance (ESI) under Section 36(1)(va) of the Income Tax Act, 1961 has been one of the most enduring disputes in Indian tax jurisprudence. After years of conflicting judicial opinions, a fresh legislative intervention through Budget 2026 has finally put this debate to rest — at least prospectively. However, the resolution of past and pending disputes continues to demand careful attention from assessees and their advisors.
Statutory Framework: Understanding the Core Provisions
How Employees' Contributions Become the Employer's Income
To appreciate the depth of this controversy, one must first understand the statutory architecture. Section 2(24)(x) of the Income Tax Act, 1961 brings within the definition of "income" any amount collected by the assessee-employer from its employees as contributions to:
- Provident Fund or Superannuation Fund
- Any fund established under the Employees' State Insurance Act, 1948
- Any other welfare fund maintained for the benefit of employees
The relevant statutory text reads as follows:
"Sec. 2. Definitions.— In this Act, unless the context otherwise requires,— …… (24) 'income' includes— …… (x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees;…"
In essence, once an employer withholds PF or ESI contributions from employee salaries, those amounts are treated as the employer's income under the Act. Without a corresponding deduction provision, this would lead to taxation of amounts that the employer holds merely in a fiduciary capacity.
The Deduction Route Under Section 36(1)(va)
Relief from such deemed income is granted through Section 36(1)(va), which permits a deduction provided the collected amounts are credited to the relevant fund on or before the prescribed due date. The provision reads:
"(va) any sum received by the assessee from any of his employees to which the provisions of sub-cl. (x) of cl. (24) of s. 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date."
The critical phrase here is "due date", which has been the epicentre of all litigation.
Explanation 1 to Section 36(1)(va): Defining "Due Date"
The legislature defined "due date" through Explanation 1 in the following terms:
"Explanation 1.—For the purposes of this clause, 'due date' means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, Rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise."
This explanation effectively imports the due date from labour legislation — specifically the EPF Act and the ESI Act — into the Income Tax Act, 1961 for the purpose of determining deductibility.
Explanation 2 and the Exclusion of Section 43B
Explanation 2 to Section 36(1)(va) further clarifies:
"Explanation 2.—For the removal of doubts, it is hereby clarified that the provisions of s. 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the "due date" under this clause."
This exclusion of Section 43B — which otherwise permits deductions for certain payments made on or before the filing of the return — was itself a source of significant controversy and ultimately became the nucleus of conflicting judicial interpretations across India.
Labour Law Due Dates: EPF and ESI Provisions
EPF Scheme — Rule 38: Mode of Payment
The due date for depositing PF contributions is governed by Rule 38 of the EPF Scheme, 1952, which provides:
"Rule 38 – Mode of payment of contributions.—(1) The employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee's contribution from his wages which together with his own contribution as well as an administrative charge of such percentage of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employee and in respect of which provident fund contributions are payable, as the Central Government may fix, he shall within fifteen days of the close of every month pay the same to the Fund electronic through internet banking of the State Bank of India or any other Nationalised Bank or through PayGov platform or through scheduled banks in India including private sector banks authorized for collection on account of contributions and administrative charge."