Employee benefit outflows such as gratuity, leave encashment, and bonus attract direct application of Sections 36, 40A, and 43B of the Income Tax Act. Their reporting spans three layers: financial statements (AS 15/Ind AS 19), tax audit (Form 3CD), and ITR disclosures (Schedule OI – Other Information). Misalignment in any layer often leads to tax disallowances or litigation.

This note provides a comprehensive compliance framework for tax auditors, CFOs, and finance teams.

Legal Framework and Governing Sections

Item	Governing Sections	Allowability Principle	Disallowance / Restriction
Gratuity	Sec. 40A(7), Sec. 36(1)(v), Sec. 43B	Deduction allowed if paid to an approved gratuity fund or actually paid to employees.	Provision not deductible unless paid into approved fund.
Leave Salary	Sec. 43B(f), Sec. 10(10AA)	Deduction only on actual payment basis.	Provision or unpaid leave salary disallowed, even if actuarially valued.
Bonus	Sec. 43B(c)	Deduction allowed if paid on or before ITR filing due date.	Provision or unpaid amounts beyond ITR due date disallowed.

Tax Audit Reporting – Form 3CD

Clause	Reporting Requirement	Section(s) Covered
21(e)	Disallow provision for gratuity to unapproved funds.	Sec. 40A(7)
21(c)/(f)	Disallow inadmissible payments (bonus/commission to partners, contributions to unapproved funds).	Sec. 40(b), 40A(9)
26	Report liabilities allowed only on payment basis (bonus, leave salary, gratuity to approved funds).	Sec. 43B

Key linkage: Every disallowance under Clauses 21 & 26 must flow into Schedule OI of ITR as “Expenses disallowed” under relevant sections.

Detailed Allowability & Disallowance

A. Gratuity

Allowable:
- Contribution to approved gratuity fund (Sec. 36(1)(v)).
- Actual payment to employees (Sec. 43B(b)).
Disallowable:
- Provision to unapproved funds.
- Actuarial valuation not matched by payment.
Audit / ITR Reporting:
- Form 3CD Clause 21(e): for unapproved fund provisions.
- Schedule OI of ITR-3/5/6/7: Add back disallowed gratuity under “40A(7)”.

B. Leave Salary

Allowable: Only on payment basis (Sec. 43B(f)).
Disallowable: Any provision or unpaid leave encashment.
Audit / ITR Reporting:
- Form 3CD Clause 26: report unpaid leave salary.
- Schedule OI of ITR-3/5/6/7: Add back unpaid portion under “43B(f)”.

C. Bonus

Allowable: Actual payment up to ITR filing due date (Sec. 43B(c)).
Disallowable:
- Provision not paid.
- Payments camouflaged as dividend.
Audit / ITR Reporting:
- Form 3CD Clause 26: with date and amount of payment.
- Schedule OI of ITR-3/5/6/7: Add back unpaid amounts under “43B(c)”.

Disclosure in “Other Information” (Schedule OI) – ITR-3, ITR-5, ITR-6, ITR-7

For business taxpayers, Schedule OI requires separate reporting of inadmissible expenses. Gratuity, leave encashment, and bonus fall under this disclosure.

A. Format of Reporting

40A(7): Provision for gratuity not allowable.
43B(c): Bonus unpaid on or before ITR due date.
43B(f): Leave salary unpaid on or before ITR due date.

Disclosure steps:

Compute inadmissible amounts as per tax audit (Clauses 21 & 26).
Reflect same figures in Schedule OI → Part A-OI → "Amount debited to P&L but disallowable under specific sections".
Ensure reconciliation with Profit & Loss account, Form 3CD reporting, and tax computation.

B. Illustrative Disclosure in ITR

Gratuity: ₹5,00,000 provision to unapproved fund → disclosed in Schedule OI under “40A(7)”.
Leave Salary: ₹3,00,000 unpaid leave encashment provision → disclosed under “43B(f)”.
Bonus: ₹2,50,000 declared but not paid till ITR due date → disclosed under “43B(c)”.

C. Cross-linking with Computation of Income

These amounts are added back in Schedule BP (Business Profits).
Corresponding disclosure is mandatory in Schedule OI.
If paid in later year, deduction allowable in that year only (auto reconciliation required).

Financial Statement Perspective

AS 15 / Ind AS 19 require recognition of provisions for gratuity/leave encashment on actuarial basis.
These provisions create temporary differences, requiring deferred tax adjustment (AS 22 / Ind AS 12).
Finance teams must maintain a tax audit reconciliation statement to explain divergence between book provisions vs. tax allowability under Sec. 43B.

Practical Audit Checklist

Verify actual payment through bank transfer or NEFT date.
Match Form 3CD disallowances with Schedule OI figures.
Ensure no double deduction (provision in one year and payment in next without adjustment).
Maintain supporting documents: gratuity fund approval letters, actuarial reports, board resolutions, and payment proofs.

FAQs

Q1. If gratuity fund is pending approval, can it be claimed in Schedule OI?
No. Deduction allowed only after approval and contribution; till then, disclose as disallowance under 40A(7).

Q2. If bonus is paid after ITR due date, how to report?
Add back under 43B(c) in Schedule OI for the current year. Deduct in the following year on actual payment.

Q3. Is provision for leave encashment allowable if based on actuarial certificate?
No. Must be reported under 43B(f) in Schedule OI until actually paid.

References

Income Tax Act: Sec. 10(10), 10(10AA), 36(1)(v), 40A(7), 40A(9), 43B.
Form 3CD: Clauses 21(e), 21(c)/(f), 26.
ITR Forms: Schedule OI of ITR-3, ITR-5, ITR-6, ITR-7.
Accounting Standards: AS 15 / Ind AS 19, AS 22 / Ind AS 12.
Guidance: ICAI Guidance Note on Tax Audit u/s 44AB, CBDT circulars.

Conclusion

For business taxpayers filing ITR-3/5/6/7, the treatment of gratuity, leave encashment, and bonus must be aligned across three dimensions:

Financial Statements (AS 15 / Ind AS 19 provisions),
Tax Audit Form 3CD (Clauses 21 & 26), and
ITR Schedule OI (Other Information disclosures).

The golden rule is clear: deduction = payment, not provision. Proper linkage and disclosure in Schedule OI ensure transparency, prevent disputes, and safeguard compliance during assessments.

Schedule OI Compliance Matrix – Gratuity, Leave Salary & Bonus

Item	Allowability Test	Form 3CD Clause	ITR Disclosure (Schedule OI)
Gratuity	Allowed only if paid to approved gratuity fund (Sec. 36(1)(v)) or actually paid (Sec. 43B). Provision to unapproved fund not deductible.	Clause 21(e), Clause 26	Add back under 40A(7) if unapproved; unpaid contribution under 43B(b).
Leave Salary	Allowed only on actual payment basis (Sec. 43B(f)). Provision or unpaid balance disallowed.	Clause 26	Add back unpaid portion under 43B(f).
Bonus	Deduction allowed only if paid on or before ITR due date (Sec. 43B(c)).	Clause 26	Add back unpaid portion under 43B(c).

Pages

Friday, September 19, 2025

Handling Gratuity, Leave Salary, and Bonus under Indian Income Tax Audit, ITR Filing (Schedule OI) & Financial Statements