Can I Claim Employee Salaries and Wages as a Business Expense in India?
Yes: salaries, wages, bonus, and allowances paid to employees are fully deductible under Section 37(1) of the Income Tax Act. The employer must deduct TDS under Section 192 at applicable slab rates and comply with EPF (12% employer contribution) and ESIC obligations. Employer PF contributions are also deductible.
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What Income Tax Department (CBDT) says
Section 37(1) IT Act 1961 allows salary costs wholly incurred for business. Section 192 requires TDS on salary income. Employer PF contribution (Section 36(1)(iv)) is specifically deductible. Salary paid to a director-shareholder is deductible if commercially reasonable and if the director performs real work: excessive remuneration may be disallowed. The employer deducts TDS on salary each month at the employee's slab under Section 192, deposits it by the 7th of the following month and files the quarterly return in Form 24Q. Form 16 is issued to each employee after the year ends. EPF is 12% from the employer and 12% from the employee on basic pay plus dearness allowance, and the employer share splits into 8.33% for the Employees' Pension Scheme (on wages capped at INR 15,000 a month) and 3.67% for EPF. ESIC covers employees earning up to INR 21,000 a month, with 3.25% from the employer and 0.75% from the employee.
When you can claim
- Monthly salary, wages, and allowances paid to employees
- Employer's share of EPF (12% of basic salary)
- Employer's ESIC contribution (3.25% for companies with 10+ employees)
- Performance bonus, ex-gratia, and incentive payments
- Leave encashment provisions (deductible when actually paid)
- Gratuity provisions (deductible when paid to employees or to approved gratuity fund)
- Professional tax paid on behalf of employees, where the state levies it and the employer bears it
When you cannot claim
- Cash payments to any one person that exceed INR 10,000 in a day (Section 40A(3) disallowance), so salaries are paid by bank transfer
- Excessive director remuneration with no corresponding business justification
- Advances against salary (not expenses until salary is earned)
- Statutory dues such as EPF and ESIC deposited after the due date, where the disallowance rules apply
Good to know
Pro tip: Use the Section 80JJAA deduction to claim an additional 30% deduction on salaries paid to new employees (earning up to INR 25,000/month, employed for 240+ days/year) for 3 years. This works even under the 115BAA concessional tax rate. Always pay salary by bank transfer to avoid the Section 40A(3) cash disallowance and to have clear evidence for TDS compliance.
Important: Which Act applies depends on the year. Income earned up to 31 March 2026 (FY2025-26, assessed in AY2026-27) is governed by the Income Tax Act, 1961. From 1 April 2026 the Income-tax Act, 2025 applies for tax year 2026-27, and its section numbers differ from the 1961 Act cited here. The TDS sections 192 to 194T are consolidated into sections 392 and 393, and the TDS rates and thresholds were retained.
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