Section 181 of companies act 2013
This query is : Resolved
07 June 2014
Hello Sir/Ma'am,
Whether any contribution made to the fund, which is directly in relation to the welfare of its employees, amounts to Charitable Contribution under Companies Act 2013?
Read more at: https://www.caclubindia.com/forum/sec-181-of-companies-act-2013-charitable-contribution-293920.asp#.U5LjAnKSxac
Whether any contribution made to the fund, which is directly in relation to the welfare of its employees, amounts to Charitable Contribution under Companies Act 2013?
Read more at: https://www.caclubindia.com/forum/sec-181-of-companies-act-2013-charitable-contribution-293920.asp#.U5LjAnKSxac
07 June 2014
No it will not amount to a Charitable Contribution as the same amount is shown as welfare expenses under Employee Benefit Expenses.
07 June 2014
Thanks for the reply Mr.Sanjay
I would like to remind you that the same situation was covered under Companies Act,1956, where it was specifically excluded from the meaning of Charitable Contribution.
But in Companies Act 2013, Act does not specifically exclude/include such situation.
I would like to remind you that the same situation was covered under Companies Act,1956, where it was specifically excluded from the meaning of Charitable Contribution.
But in Companies Act 2013, Act does not specifically exclude/include such situation.
07 June 2014
Yes there is no specific exclusion but as per AS 15 it will be a part of Employees Benefit and therefore it should not be treated as Charitable Contribution.
It is as per my understanding. But the section needs more clarity.
It is as per my understanding. But the section needs more clarity.
08 June 2014
I don't think AS-15 needs to be considered here.
08 June 2014
Uts not about AS15. The point is whatever is taken in employee's benefit expenses can not be a charitable contribution.
08 June 2014
I am not that expert in this field, still learning.
But if whatever taken in employee benefit expenses can not be a charitable contribution then what is the logic behind specifically exempting that situation in Companies Act,1956?
But if whatever taken in employee benefit expenses can not be a charitable contribution then what is the logic behind specifically exempting that situation in Companies Act,1956?
23 July 2025
Section 181 of the Companies Act, 2013: Charitable Contributions and Employee Welfare
You raised an important query regarding whether contributions made for the welfare of employees would be considered charitable contributions under the Companies Act, 2013, especially in light of the previous law under the Companies Act, 1956.
Let's break down the issue and clarify the points:
1. Section 181 of the Companies Act, 2013 - Charitable Contributions
Section 181 of the Companies Act, 2013 deals with the charitable contributions made by a company. Specifically, the section prohibits a company from making charitable contributions exceeding a certain limit unless the contribution is approved by the board of directors and a special resolution is passed in the general meeting.
However, the section does not explicitly cover employee welfare expenses.
2. Contribution for Employee Welfare vs Charitable Contribution
The key difference between employee welfare contributions and charitable contributions lies in the nature of the purpose of the contribution.
Employee Welfare Contributions: These are expenses incurred by a company for the benefit of its employees, such as medical benefits, pension plans, training programs, etc. Under the Companies Act, 2013, such expenses fall under the Employee Benefit Expenses (often guided by AS-15 on Employee Benefits or similar accounting standards). These are related to employee compensation and do not qualify as charitable contributions because they are made in the course of business operations.
Charitable Contributions: These refer to donations made to charitable organizations, foundations, or any purpose aimed at social welfare, religion, education, public health, etc. These are typically voluntary contributions and not part of regular business operations.
3. Is Employee Welfare Contribution a Charitable Contribution?
Under both the Companies Act, 1956 and the Companies Act, 2013, contributions made for the welfare of employees (such as contributions to employee provident funds, gratuity schemes, or medical insurance for employees) do not count as charitable contributions.
Why It’s Not Charitable:
The Companies Act, 1956 had a specific exclusion that welfare expenses for employees were not considered charitable contributions. While the Companies Act, 2013 doesn’t explicitly include or exclude this, the nature of the expenditure remains the same.
Such welfare-related expenses are treated as part of the employee benefits under the Indian Accounting Standards (Ind AS 19 or AS 15), and are accounted for in the company’s P&L statement under Employee Benefit Expenses.
The purpose of these contributions is not to advance any charitable cause or public welfare outside the company’s direct business activities but to provide benefits directly related to employee well-being.
4. Section 181 (Charitable Contributions) and Employee Welfare
Employee welfare expenses are not aimed at benefiting society or charity. They are part of business expenses incurred to maintain and improve the welfare of employees.
Section 181 of the Companies Act, 2013 governs donations to charities and social causes. If a company wants to make a donation to a charity or fund (outside of the employee welfare scheme), the board must pass a resolution, and in some cases, a special resolution is required.
The exemption or exclusion seen under the Companies Act, 1956 was because employee welfare expenses are business-related, and not part of the charitable activities that Section 181 was meant to regulate.
5. AS 15 (Employee Benefits) - Why It's Not Relevant Here
AS 15 (Accounting Standard 15 on Employee Benefits) governs how companies should account for employee benefits like salaries, pensions, and other welfare-related expenses. It defines how these benefits should be treated from an accounting perspective but does not impact whether such expenses are classified as charitable contributions under the Companies Act.
The issue here is that employee welfare expenses are part of business operations, whereas charitable contributions are donations to external causes unrelated to the business's day-to-day functioning.
6. The Logic Behind Exemption Under the Companies Act, 1956
Under the Companies Act, 1956, there was an explicit exemption stating that employee welfare contributions were not to be considered charitable contributions. This was a clarification that helped companies avoid any confusion, ensuring that regular welfare expenses for employees (which are part of normal business operations) wouldn’t be counted under the charitable contributions cap.
Although the Companies Act, 2013 doesn't explicitly state this exemption, the business nature of employee welfare expenses inherently excludes them from being considered charitable contributions.
Conclusion
Employee welfare contributions (like those made for employee insurance, provident fund, etc.) are not charitable contributions under the Companies Act, 2013, as these are intended for employee benefit and are part of business expenses.
Section 181 regulates donations to charitable organizations or public causes, not expenses related to employee benefits.
While the Companies Act, 2013 does not explicitly exclude employee welfare expenses from being charitable contributions, the nature of these expenses (as per AS 15 and regular accounting practices) clearly indicates they are not charitable donations.
You raised an important query regarding whether contributions made for the welfare of employees would be considered charitable contributions under the Companies Act, 2013, especially in light of the previous law under the Companies Act, 1956.
Let's break down the issue and clarify the points:
1. Section 181 of the Companies Act, 2013 - Charitable Contributions
Section 181 of the Companies Act, 2013 deals with the charitable contributions made by a company. Specifically, the section prohibits a company from making charitable contributions exceeding a certain limit unless the contribution is approved by the board of directors and a special resolution is passed in the general meeting.
However, the section does not explicitly cover employee welfare expenses.
2. Contribution for Employee Welfare vs Charitable Contribution
The key difference between employee welfare contributions and charitable contributions lies in the nature of the purpose of the contribution.
Employee Welfare Contributions: These are expenses incurred by a company for the benefit of its employees, such as medical benefits, pension plans, training programs, etc. Under the Companies Act, 2013, such expenses fall under the Employee Benefit Expenses (often guided by AS-15 on Employee Benefits or similar accounting standards). These are related to employee compensation and do not qualify as charitable contributions because they are made in the course of business operations.
Charitable Contributions: These refer to donations made to charitable organizations, foundations, or any purpose aimed at social welfare, religion, education, public health, etc. These are typically voluntary contributions and not part of regular business operations.
3. Is Employee Welfare Contribution a Charitable Contribution?
Under both the Companies Act, 1956 and the Companies Act, 2013, contributions made for the welfare of employees (such as contributions to employee provident funds, gratuity schemes, or medical insurance for employees) do not count as charitable contributions.
Why It’s Not Charitable:
The Companies Act, 1956 had a specific exclusion that welfare expenses for employees were not considered charitable contributions. While the Companies Act, 2013 doesn’t explicitly include or exclude this, the nature of the expenditure remains the same.
Such welfare-related expenses are treated as part of the employee benefits under the Indian Accounting Standards (Ind AS 19 or AS 15), and are accounted for in the company’s P&L statement under Employee Benefit Expenses.
The purpose of these contributions is not to advance any charitable cause or public welfare outside the company’s direct business activities but to provide benefits directly related to employee well-being.
4. Section 181 (Charitable Contributions) and Employee Welfare
Employee welfare expenses are not aimed at benefiting society or charity. They are part of business expenses incurred to maintain and improve the welfare of employees.
Section 181 of the Companies Act, 2013 governs donations to charities and social causes. If a company wants to make a donation to a charity or fund (outside of the employee welfare scheme), the board must pass a resolution, and in some cases, a special resolution is required.
The exemption or exclusion seen under the Companies Act, 1956 was because employee welfare expenses are business-related, and not part of the charitable activities that Section 181 was meant to regulate.
5. AS 15 (Employee Benefits) - Why It's Not Relevant Here
AS 15 (Accounting Standard 15 on Employee Benefits) governs how companies should account for employee benefits like salaries, pensions, and other welfare-related expenses. It defines how these benefits should be treated from an accounting perspective but does not impact whether such expenses are classified as charitable contributions under the Companies Act.
The issue here is that employee welfare expenses are part of business operations, whereas charitable contributions are donations to external causes unrelated to the business's day-to-day functioning.
6. The Logic Behind Exemption Under the Companies Act, 1956
Under the Companies Act, 1956, there was an explicit exemption stating that employee welfare contributions were not to be considered charitable contributions. This was a clarification that helped companies avoid any confusion, ensuring that regular welfare expenses for employees (which are part of normal business operations) wouldn’t be counted under the charitable contributions cap.
Although the Companies Act, 2013 doesn't explicitly state this exemption, the business nature of employee welfare expenses inherently excludes them from being considered charitable contributions.
Conclusion
Employee welfare contributions (like those made for employee insurance, provident fund, etc.) are not charitable contributions under the Companies Act, 2013, as these are intended for employee benefit and are part of business expenses.
Section 181 regulates donations to charitable organizations or public causes, not expenses related to employee benefits.
While the Companies Act, 2013 does not explicitly exclude employee welfare expenses from being charitable contributions, the nature of these expenses (as per AS 15 and regular accounting practices) clearly indicates they are not charitable donations.
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