Treatment of provision for gratuity in tax audit (3CA and 3CD). While doing tax Audit under section 44AB of income tax act one may come across the disallowances u/s 43B . This includes payment based deductions such as ”Provident fund”, leave encashment, gratuity etc. Here I’m discussing some basic issues about gratuity and its treatment in different cases.

Treatment of provision for gratuity in tax audit (3CA and 3CD)

It’s known to all that Gratuity is a retirement benefit. It is generally payable at the time of cessation of employment and on the basis of duration of service.

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Normally most of the business organizations used to create some provision for meeting the coming future needs of paying out the gratuity for the service rendered by the employees.


There are further different methods in managing the gratuity funds. some companies create gratuity fund which will be management by their team of members. Funded gratuity means its funds would be invested somewhere. U funded gratuity is purely contrary to funded i.e no amount is invested in any funds.

There are further two types of gratuity funds.First one is recognized gratuity and another is unrecognized gratuity. If a gratuity fund is recognized by commissioner of income tax then it is called as recognized gratuity. Normally funded ,recognized gratuity is allowed as deduction to the extent the amount is paid out of the pocket of the company.

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There’s a case law where the company contributes certain amount as gratuity by paying a group insurance premium for its employees. Initially it was disallowed by the department stating that it is not deposited/paid into the fund. But the verdict of court where the assessee went with further petition allowed it as deduction. Court justified that the amount is paid to the insurer by the employer on behalf of the employees. Hence the intention behind the provision has not been violated. So the deduction is allowed.

Normally during the times of filing form 3CA , 3CD gratuity paid out of pocket of the company only will be allowed as deduction.

First we will disallow the provision initially later the amount of gratuity paid towards gratuity fund will be allowed as deduction.

The case law here I referred is M/s Textool Ltd and CIT Coimbatore.

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