PF & ESI Disallowance Removed as Income Tax Act 2025 allows Deposit till ITR Due Date

The era of the new income tax bill has started and has already taken effect from 1st April 2026. Business entities are rushing to comply with existing rules, completely new enacted rules, and rules with slight changes. Important consideration should be given to rules with slight changes; these changes apparently look like tiny changes but have a big impact on compliance. In this connection, this article takes such instances of compliance and explains how rules with slight changes under the new income tax bill impact the compliance burden, tax planning, and the calculation of the income tax provision.

Under the new income tax bill, any statutory fund collected from employees by an employer must be deposited with the concerned government department within the due date of ITR filing to avoid the permanent disallowance of such funds. This differs from the old law, where the employer was required to deposit such fund amounts within the respective due date of the specific fund (for example, the PF due date for March being April 15th). In this case, while the compliance requirement remains the same, the burden of meeting the deadline becomes a relief under the new income tax bill. Previously, even a one-day delay created a double burden for the employer, as they had to pay penalties and interest under the respective act along with extra tax on additional income due to permanent disallowance.

Starting from the 2026-27 tax year, business entities will be liberated from the burden of litigation under the Income Tax Act for genuine cases, provided that compliance is met within the due date for filing income tax returns.

Ultimately, this change reflects a shift in legislative intent – focusing on the actual fulfilment of the obligation rather than penalizing the specific timing of the transaction.

Comparative Analysis of Compliance Relief: Statutory Fund Deposits under the Old vs. New Income Tax Laws

Following important considerations to be considered alongside the above table

a) Although the table illustrates the relief of the compliance burden specifically for audit cases, the same compliance requirements and relief apply to non-audit cases, with the exception of those falling under presumptive taxation

b) While the New Income Tax Bill provides significant relief by eliminating permanent disallowances for delayed deposits, it is crucial to note that interest and penalties under the respective fund acts (e.g., the PF Act and ESI Act) remain fully applicable. The tax amendment only mitigates the income tax burden; it does not waive the statutory obligations or penalties mandated by labor laws.

c) From a financial reporting perspective, the shift from ‘permanent disallowance’ to ‘allowability upon payment before ITR’ simplifies the calculation of income tax provisions. Tax planning strategies should be reassessed, as the risk of a high effective tax rate due to minor timing differences-such as the 25.17% tax impact shown in the table-is now significantly mitigated for the 2026-27 tax year onwards.

Relevant Legal text from respective acts

Income Tax Act 1961 (OLD Law) – Section 36(1)(iv)

(iv) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or to the contributions or to the number of members of the fund;

[(va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 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. Explanation.—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;]

Income Tax code 2025  (New Law) – Section 29

29. (1) The following sums, in the case of an assessee being an employer, shall be allowed as deduction in computing income chargeable under section 26:— (a) any sum paid by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to— (i) such limits, as may be prescribed, for recognising the provident fund or approving the superannuation fund; and (ii) such conditions, as the Board may specify, for cases where the contributions are not made annually either as fixed amounts, or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or the contributions or to the number of members of the fund;

(e) the amount of contribution received from an employee to which the provi sions of section 2(49)(o) apply, if it is credited by the assessee to the account of the employee in the relevant fund or funds, on or before the due date of filing of return of income under section 263(1) for the tax year.

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Disclaimer: The information provided in this article is for educational purposes only. It should neither be regarded as comprehensive nor sufficient for making financial decisions, and it must not be used as a substitute for professional advice. The author accepts no responsibility for any loss arising from any action taken or not taken by anyone using the information contained herein