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CS Executive · Tax Laws and Practice · Computation of Total Income and Tax Liability of various Entities

Under the Income-tax Act, 2025 (applicable from the June 2027 session), a firm's employer contribution to a gratuity fund for tax year 2026-27 is otherwise deductible. Under section 37, in which tax year is the deduction allowed if the amount is actually paid before the due date of filing the return for that year?

The deduction is allowed in tax year 2026-27. Section 37(3) lets listed sums, such as employer contributions to a gratuity fund, be claimed in the year the liability arose if paid on or before the return filing due date, regardless of the accounting method followed.

  1. AOnly in the tax year in which it is actually paid, even if that is after the end of 2026-27
  2. BIn 2026-27, because payment on or before the return due date is treated as covering that yearCorrect
  3. CIn the year following the year of payment
  4. DIn 2026-27 only if the firm follows the mercantile system of accounting

Explanation

Section 37(1) allows listed sums only on actual payment. Section 37(3) relaxes this: if payment is made after year-end but on or before the due date of filing the return for that year, the deduction is allowed in the year the liability was incurred. The method of accounting is irrelevant, so the cash/mercantile option is wrong.

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