Under Section 37 of the Income-tax Act, 2025, your contribution as employer to PF, superannuation, gratuity or other employee welfare funds, and leave encashment payable to employees, are deductible only when actually paid, but payment before the due date of your income-tax return saves the deduction for the year (Section 37(3)). Employees' own PF and ESI contributions that you deduct from salary are outside Section 37 and must be deposited by the PF and ESI due dates. After 31 March, salary TDS is reported in the quarterly Form 138 and the employee certificate is Form 130 (earlier Form 16), due by 15 June.
What Section 37 means for March payroll
| Staff cost booked in March 2027 | Rule | To keep the deduction in 2026-27 |
|---|---|---|
| Employer PF, EPS and EDLI share | Section 37(2)(b), actual payment | Pay by the return due date; in practice by the PF due date, 15 April |
| Employer ESI share | Section 37(2)(b), employee welfare fund | Pay by the return due date; in practice by the ESI due date, 15 April |
| Gratuity fund or superannuation contribution | Section 37(2)(b) | Pay into the approved fund by the return due date |
| Provision for leave encashment | Section 37(2)(c) | Only the amount actually paid by the return due date is allowed |
| Employee PF and ESI deducted from salary | Outside Section 37 (sub-section (6)) | Deposit by the PF and ESI due dates; late deposit risks disallowance |
| March salary itself | Normal accrual | Allowed in 2026-27; TDS must be deducted and deposited on time |
The employee share needs the most care. Under the old Act the Supreme Court held in Checkmate Services (2022) that employees' contributions deposited after the PF or ESI due date are not deductible, even if paid before the return. Section 37(6) keeps these sums out of the "pay before the return" relief, so treat the statutory due date as the deadline.
Worked example (hypothetical)
A Hyderabad firm has a March 2027 payroll of ₹8,00,000 basic plus DA for 40 staff, all covered by PF.
- Employee PF at 12%: ₹96,000 deducted from salary. Deposited on 14 April 2027, before the 15 April due date: fine.
- Employer PF share at 12%: ₹96,000. Paid on 14 April 2027 with the same challan: deductible in 2026-27 under Section 37(3).
- Leave encashment provision at year-end: ₹2,40,000. ₹60,000 is paid to two staff who leave in May 2027; the rest stays as a provision. Only ₹60,000 is allowed for 2026-27; ₹1,80,000 waits until it is paid.
Run the numbers for any employee with the PF calculator and ESI calculator.
Certificates and returns after 31 March
- Close the year's salary TDS: collect final proofs, compute tax under the regime each employee chose and deduct any shortfall from March salary. See TDS on salary.
- File the fourth-quarter TDS statement in Form 138. Form 130 can only be generated once that statement is processed.
- Download Form 130 from TRACES and issue it to every employee by 15 June 2027. A certificate prepared any other way is not valid. See Form 16 and Form 130.
- Correct mistakes by filing a revised Form 138, then reissue Form 130.
- Employees who changed jobs: each employer issues Parts A and B for its period.
Form 130 is for tax year 2026-27 onwards. For salary paid in FY 2025-26, under the 1961 Act, the certificate is still Form 16.
Other year-end staff items
- ESI contribution periods run April to September and October to March; March closes one, so check every eligible employee was covered.
- Gratuity: if you have no approved fund, the provision is not a deduction; payments are. Estimate liabilities with the gratuity calculator.
- Full and final settlements in March: pay before the return due date to claim the leave encashment part.
FundRaksha HR computes PF, ESI, PT and TDS on every payroll run and produces the PF ECR, ESI and bank files, so March payments go out before the due dates. It starts at ₹49 per employee per month with a free trial.
Sources
Last reviewed: 2026-10-21. Information for Indian businesses; not legal advice.