How to get deduction of expenditure incurred for Voluntary Retirement Scheme (VRS) under the Income Tax Act?

✅ Relevant Legal Provision:

• Section 35DDA of the Income Tax Act, 1961

📜 Bare Act Extract – Section 35DDA (1):

“Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement in accordance with any scheme of voluntary retirement, one-fifth of the amount so paid shall be deducted in computing the profits and gains of business for that previous year; and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years.”

🧮 Explanation & Computation of Deduction:

If a company or firm pays any amount to employees under a Voluntary Retirement Scheme (VRS), the deduction is not allowed as a lump sum in the same financial year. Instead:

• 1/5th (20%) of the VRS expense is allowed in the year of payment, and

• The remaining 4/5th is spread equally over the next four financial years.

This ensures a structured deduction benefit over five years.

✅ Conditions to Claim Deduction under Section 35DDA:

❌ Deduction Not Allowed If:

• VRS scheme not in accordance with Rule 2BA

• Expenditure not actually paid (i.e., only provisioned)

• Claimed fully in one year (not permissible)

Below are the Relevant Legal Provision:

• Section 36(1)(ii) of the Income Tax Act, 1961

• Section 43B – Governs timing of deduction

Section 36(1)(ii) – Bonus or Commission to Employees:

“Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividends if it had not been paid as bonus or commission” – shall be allowed as a deduction.

This means:

• The bonus or commission must be genuinely paid for services rendered.

• It should not be in lieu of profits or dividends payable to the employee.

🕒 Section 43B – Timing of Deduction:

Section 43B of the Act deals with certain expenses that are allowed only on actual payment, regardless of accounting method.

As per Section 43B(b):
“Any sum payable by the assessee as an employer by way of bonus or commission to his employees shall be allowed only in the year in which such bonus or commission is actually paid, irrespective of the year in which the liability is incurred.”

✅ Exception:

If the bonus or commission is paid on or before the due date of filing the return under Section 139(1), it shall be deemed to have been paid within the year of accrual, and deduction is allowed in that same year.

Conclusion:

Deduction for Contributions to PF, ESIC, NPS, Gratuity, and Staff Welfare Fund:

1. Provident Fund (PF):

• Employer Contribution to PF:

  • As per Section 36(1)(va), the employer’s contribution to the Provident Fund (PF) is deductible from business income.

  • However, this deduction is allowed only if the contribution is made on time, i.e., before the due date of filing the return of income.

  • If the contribution is paid late, it is disallowed under Section 43B, even if it is paid before the due date of filing the return.

• Employee Contribution to PF:

  • The employee’s contribution is deductible under Section 80C within the overall limit of ₹1.5 lakh for the financial year.

2. Employees’ State Insurance Corporation (ESIC):

• Employer’s Contribution to ESIC:

  • The employer’s contribution to ESIC is deductible under Section 36(1)(va) as a business expense. Similar to PF, the contribution must be made before the due date of filing the income tax return to qualify for the deduction.

• Employee’s Contribution to ESIC:

  • The employee’s contribution to ESIC is not directly deductible from the individual’s income under the Income Tax Act.

3. National Pension Scheme (NPS):

• Employer’s Contribution to NPS:

  • As per Section 80CCD(2), the employer’s contribution to an NPS account of the employee is eligible for a deduction. This deduction is over and above the limit of ₹1.5 lakh under Section 80C.

  • The contribution is allowed as a deduction up to 10% of the salary (Basic + DA).

• Employee’s Contribution to NPS:

  • Section 36(1)(iv) of the Income Tax Act is the section under which an employer’s contribution to a recognized provident fund, superannuation fund, or pension scheme (such as NPS) is eligible for a deduction from the employer’s taxable income.

  • The employee’s contribution to NPS qualifies for a deduction under Section 80CCD(1) to an Employee, subject to the overall limit of ₹1.5 lakh under Section 80C.

  • In addition to this, Section 80CCD(1B) allows an additional deduction of ₹50,000 for contributions made to NPS, which is over and above the ₹1.5 lakh limit.

4. Gratuity:

• Employer’s Contribution to Gratuity Fund:

  • The contribution made by the employer to a recognized Gratuity Fund is eligible for a deduction under Section 36(1)(v).

  • The deduction is allowed for the amount that has been paid or provided for in the books of account in accordance with the actuarial valuation.

• Employee’s Gratuity:

  • Employees do not get a deduction for gratuity contributions under the Income Tax Act. However, gratuity received is exempt under Section 10(10), subject to specific limits and conditions.

5. Staff Welfare Fund:

• Expenditure on Staff Welfare:

  • Contributions to a staff welfare fund by the employer are deductible under Section 37(1), provided the expenditure is wholly and exclusively incurred for the benefit of the employees and is not of a capital nature. This could include expenses on activities like health programs, recreational activities, or educational expenses for employees.

• Employee Contributions to Welfare Fund:

  • Employee contributions to staff welfare funds are not deductible under the Income Tax Act, unless the contributions are for specific programs that qualify as deductions under other provisions.

Under the Income Tax Act, the treatment of MTM losses depends on the nature of the asset and the transaction involved. Here’s a breakdown of how these losses are treated:

1. For Business or Profession:

If a taxpayer is engaged in trading activities (for example, as a trader in stocks or securities), MTM losses can generally be claimed as a deduction under Section 37(1) as a business expense. However, the following conditions must be met:

• The asset is held as part of the trading business, not as an investment.

• The loss is incurred in the course of business operations, and not for personal reasons.

• The loss is actual (i.e., a real loss based on the current market price and not just an unrealized one) and can be substantiated with proper documents, such as trading statements.

2. For Speculative Transactions (Section 43(5)):

If the transaction is classified as speculative, then the treatment of MTM losses becomes more restrictive:

• Speculative losses are not deductible against any other income, except for speculative profits. These losses can only be set off against speculative profits in the same financial year or carried forward for a period of up to four subsequent years (as per Section 73).

• The MTM loss in speculative transactions (such as in futures contracts or derivatives trading) would be treated as speculative loss unless the taxpayer qualifies as a trader (i.e., the trading activity is substantial and systematic).

As per Section 44AB:“Every person carrying on business or profession, if his turnover exceeds the prescribed limits, shall get his accounts audited and furnish the report of such audit in the prescribed form before the specified date.”

The term “specified date” is explained in Explanation (ii) to Section 44AB:“’Specified date’ means the due date for furnishing the return of income under sub-section (1) of section 139.”

FY 2024–25, the due dates are as follows: