Employee welfare is often the heart of a good organisation. Between long hours, shifting responsibilities, and the constant push for growth, benefits like provident fund & superannuation matter more than we realise. But these benefits bring responsibilities too — especially for employers. That’s where Section 36(1)(iv) steps in, making employee welfare financially smoother and tax-efficient for businesses.
This provision permits an employer to claim a deduction for contributions made to a recognized provident fund or an approved superannuation fund for employees, as long as certain conditions are fulfilled. It ensures that the employer’s liability is to be paid out of its income, and not through borrowed funds or irregular accounts.
What Is Section 36(1)(iv)?
At its core, Section 36(1)(iv) of the Income Tax Act allows employers to claim deductions for contributions made to:
- Recognized provident funds, and
- Approved superannuation funds
This deduction applies while computing business income, making it an extremely practical benefit for employers who want to build long-term financial security for their employees.
This section matters because employee benefits can become expensive over time, & this provision ensures that employers get fair tax relief while doing the right thing.
Employer’s Contribution Towards Provident Fund
Provident fund contributions are the backbone of retirement planning for most salaried individuals. Under this section:
- The employer’s contribution towards provident fund is allowed as a deduction"
- The deduction is available only if the employer actually contributes the amount
- And the contribution must be in accordance with the fund’s rules & regulations
A small but important detail:
The contribution should be paid out of employer’s income. This means the business cannot borrow money just to show a contribution on paper. The fund must be backed by real business income.
Also Read: Interest on Borrowed Capital Explained
Contribution to Superannuation Fund
Superannuation is the lesser-known cousin of provident fund, but it’s incredibly valuable. If the employer contributes to an approved superannuation fund, Section 36(1)(iv) allows deduction for this too. Many employees don’t realise that their retirement pool silently grows because their employer gets tax benefits — and the benefit passes on in the form of long-term security.
What “Paid Out of Its Income” Really Means
This phrase confuses many people, especially small business owners. It simply means:
- The employer cannot show the contribution as an expense
- Unless the money is truly paid from the company’s earnings
- Not through loans, advances, adjustments, or future promises
It’s the law’s way of ensuring that contributions to employees’ futures are real, funded, and trustworthy.
I once explained this to a startup founder who was juggling cashflow issues. His response was,
“So the law wants us to take responsibility before taking credit.”
A perfect summary.
Conditions for Claiming Deduction Under Section 36(1)(iv)
To claim this deduction:
- The fund must be recognized or approved
- Contributions must be within prescribed limits
- Payments must be made during the relevant financial year
- Employer must follow the guidelines under the Provident Fund Act & Fourth Schedule
If any of these conditions break, the deduction may be denied — and nobody wants that during scrutiny.
Also Read: The Hidden Deduction Shield for Banks on Bad Loans
Relationship With Other Tax Sections
Section 36(1)(iv) works smoothly alongside:
- Section 43B — which mandates actual payment before claiming deduction
- Section 17(2) — which explains when employer contribution becomes taxable for employees
- Section 10 — which specifies exemptions related to retirement benefits
- Part B of the Fourth Schedule — which defines how approved funds must operate
Understanding these connections brings clarity to how retirement benefits flow through taxation.
Real-Life Example: How This Section Helps
Meet Rakesh, a mid-sized business owner with 60 employees.
He contributes:
- ₹8 lakh annually to provident fund
- ₹3 lakh to superannuation
Without Section 36(1)(iv), this ₹11 lakh would simply be an expense, reducing his cashflow.
But with this provision:
- He claims full deduction
- His taxable business income reduces
- His tax liability decreases
- His employees build long-term wealth
It’s a classic win-win.
Why Section 36(1)(iv) Matters More Today Than Ever
In an era where:
- Talent retention is harder
- Employees value benefits more than perks
- Retirements are longer
- Job security fluctuates
Employee-friendly contributions give stability. And Section 36(1)(iv) ensures that companies don’t feel punished for offering good benefits. It quietly strengthens employer-employee relationships without anyone making a big deal out of it.
Also Read: Section 36(1)(va: The Critical Tax Rule Every Employer Must Know
Common Mistakes Employers Make
- Delaying contributions — missing deadlines can deny deduction
- Exceeding statutory limits — excess contribution may become taxable"
- Using borrowed funds — violates the “paid out of its income” requirement
- Not ensuring fund approval — unapproved funds lose tax benefits
- Incorrect classification in accounts — leads to scrutiny issues
A simple compliance checklist can save hours of trouble during assessment.
Conclusion
Section 36(1)(iv) may sound technical at first glance, but its purpose is simple & deeply meaningful. It encourage employers to invest in their employees’ futures without financial burden. By allowing deductions for contributions to recognized provident funds and approved superannuation funds, it supports both business growth and retirement security.
And if you ever feel unsure about deductions, retirement benefits, or compliance, the friendly experts at CallMyCA.com can guide you through every detail with clarity & care.
