Quick answer: A salary provision records pay that employees have earned but not yet received: Salary A/c Dr, To Salary payable (provision for salary). Bonus, gratuity and leave encashment need provisions too, because they are earned month by month but paid later: Expense A/c Dr, To Provision for bonus / gratuity / leave encashment, then Provision Dr, To Bank when paid. Gratuity and long-term leave are measured actuarially for companies, and the provisions for gratuity (other than contributions actually paid to an approved fund by the return due date) and leave encashment are deductible for income tax only when paid.
Payroll is not only what is paid each month. At any balance sheet date, a business owes its employees salary for the last month, bonus for the year so far, gratuity for every year of service, and the value of leave they have saved. Accrual accounting requires all of these in the books. This guide explains each provision, how it is measured, the journal entries from creation to payment, and the income-tax treatment, with worked examples. For the monthly salary entries themselves, see our salary journal entry guide; for the overall picture, our guide to payroll accounting.
The four payroll provisions at a glance
| Item | Type of benefit | How it is measured | When paid |
|---|---|---|---|
| Salary for the last month | Short-term (accrual) | Actual payroll for the month | By the 7th of the next month |
| Statutory and other bonus | Short-term | Expected bonus for the period | Statutory bonus within 8 months of the year end |
| Gratuity | Post-employment, defined benefit | Actuarial valuation (simpler method allowed for some small non-company entities) | On exit, after qualifying service |
| Leave encashment | Short-term or other long-term | Expected cost of unused leave; actuarial if long-term | On encashment or exit |
The accounting standards are Ind AS 19 for companies on Ind AS and AS 15 (Revised 2005) for other companies and entities. Both require an expense in the period the employee works, not when the benefit is paid.
1. Provision for salary
March salary is paid in April, but it is March's expense. At 31 March the accrual entry is:
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Salary A/c | 6,00,000 | |
| To Salary payable A/c (net pay) | 5,25,000 | |
| To PF, ESI, PT and TDS payable A/c (deductions) | 75,000 | |
| Total | 6,00,000 | 6,00,000 |
When paid in April, debit Salary payable and credit Bank. Many businesses call this credit "provision for salary", but strictly it is an accrued liability, not a provision. A provision under the accounting standards is a liability whose amount or timing needs real estimation; salary for a completed month is known to the rupee and due within days. It is presented under other current liabilities by companies not on Ind AS, and under other current financial liabilities by Ind AS companies, separately from provisions. If payroll is not final at the cut-off, accrue an estimate and reverse it when the actual payroll is posted.
2. Provision for bonus
Statutory bonus under the Code on Wages is 8.33% to 20% of bonus wages for eligible employees and must be paid within eight months of the end of the accounting year. Because it is earned through the year, provide for it monthly. A company expecting a bonus of ₹2,40,000 for 2026-27 provides ₹20,000 a month:
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bonus A/c (employee benefits expense) | 20,000 | |
| To Provision for bonus A/c | 20,000 |
At 31 March the provision is ₹2,40,000. If the final calculation comes to ₹2,52,000, provide the extra ₹12,000 in March so the year's expense is right. When bonus is paid in, say, October 2027, debit Provision for bonus ₹2,52,000 and credit Bank (with TDS on the bonus credited to TDS payable, since bonus is taxable salary). Any excess provision left after payment is reversed to the same expense line. Our bonus calculator helps estimate the amount.
3. Provision for gratuity
Gratuity is payable on exit to employees with qualifying service (generally five years, one year for fixed-term employees) at 15 days' wages for each completed year, under the Code on Social Security (see our gratuity guide). It is a defined benefit obligation: the employer promises a benefit, not a contribution, so the accounts must estimate what has been earned so far.
How it is measured
Companies, including small and medium-sized companies, measure the obligation by actuarial valuation using the projected unit credit method, which projects each employee's final wages and probability of leaving, and discounts the result. For smaller companies, relief is mainly from disclosures; the projected unit credit method is still required. Certain smaller non-company entities with fewer than 50 employees may instead use a simpler "rational method", such as assuming all employees leave on the balance sheet date (AS 15 text, Institute of Actuaries of India). Provision is made for all employees, including those with less than five years' service, because their right builds up with each year.
Journal entries (actuarial report)
A company's actuary reports for 2026-27: opening obligation ₹10,00,000; current service cost ₹1,20,000; interest cost ₹70,000; gratuity paid to leavers ₹80,000; actuarial loss ₹30,000; closing obligation ₹11,40,000. The scheme is unfunded.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Gratuity expense A/c (service cost + interest cost) | 1,90,000 | |
| To Provision for gratuity A/c | 1,90,000 |
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Remeasurement loss A/c (OCI under Ind AS; profit and loss under AS 15) | 30,000 | |
| To Provision for gratuity A/c | 30,000 |
Gratuity paid during the year: debit Provision for gratuity ₹80,000, credit Bank. The provision now equals the closing obligation: 10,00,000 + 1,90,000 + 30,000 − 80,000 = ₹11,40,000. Many companies book the service cost monthly from the previous year's report and true it up when the new report arrives.
Funded gratuity
Many employers fund gratuity through an insurer's group gratuity scheme or an approved gratuity trust. Contributions are debited to the plan asset (or the net gratuity liability), and the balance sheet shows the obligation less the fair value of the fund. When the fund pays a leaver, the company debits the provision and credits the plan asset, with no bank entry. Our gratuity calculator gives the amount payable to an individual employee.
4. Provision for leave encashment
Unused earned leave that can be carried forward or encashed is an obligation as employees earn it. Where the leave benefit is expected to be settled wholly within 12 months of the year end, it is a short-term benefit, measured at the undiscounted expected cost; otherwise it is an other long-term benefit, measured actuarially by companies, with remeasurements taken to profit and loss under both standards.
Example: a company's leave obligation is ₹3,20,000 at 1 April 2026 and ₹4,00,000 at 31 March 2027; it paid ₹50,000 of leave encashment to leavers during the year. The year's charge is 4,00,000 − 3,20,000 + 50,000 = ₹1,30,000:
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Leave encashment expense A/c | 1,30,000 | |
| To Provision for leave encashment A/c | 1,30,000 |
The payments during the year were debited to the provision (debit Provision for leave encashment ₹50,000, credit Bank). For a single employee, the encashment value depends on the leave rules and the salary used; our leave encashment calculator and leave accrual calculator help with the figures.
Income-tax treatment of payroll provisions
| Provision | Deductible for income tax |
|---|---|
| Salary payable | In the year of accrual (it is a known liability), provided TDS has been deducted and paid |
| Bonus | In the year of accrual only if paid by the due date of the return (section 37); otherwise in the year of payment |
| Gratuity (unfunded) | Not on provision; deductible when gratuity becomes payable or is paid |
| Gratuity (approved fund) | Provision for contribution to an approved gratuity fund is allowed under section 29(1)(d), but under section 37 only to the extent the contribution is actually paid in the year or by the due date of the return |
| Leave encashment | Only when actually paid |
Section 29(1)(d) of the Income-tax Act, 2025 allows a provision made for contribution to an approved gratuity fund, or for gratuity that has become payable during the year (Income Tax Department, section 29). The differences between the books and the tax computation create deferred tax, which companies account for under the tax-accounting standard. Late payment of bonus or leave encashment simply moves the deduction to the year of payment.
Presentation in the balance sheet
- Salary payable and other employee dues: current liabilities.
- Provision for bonus: current, since it is paid within the following year.
- Provision for gratuity and leave encashment: split into current (the part expected to be paid in the next 12 months, as reported by the actuary) and non-current.
- Expense: all of these sit within employee benefits expense, under contribution to provident and other funds or salaries and wages, with gratuity remeasurements in other comprehensive income under Ind AS.
Common mistakes with payroll provisions
- Booking gratuity only when paid: this ignores years of accumulated liability and produces a large, unexplained expense whenever a long-serving employee leaves.
- Providing only for employees with five years' service: the obligation builds up from the first year, so the actuarial valuation includes everyone.
- Charging payments to expense as well as the provision: once a provision exists, payments are debited to the provision; debiting expense again double-counts the cost.
- Using old wage data: a valuation on pre-Labour-Code wages or out-of-date salaries understates the obligation.
- Never truing up the bonus provision: leaves an over- or under-provision that distorts the next year's expense.
- Claiming tax deduction on the provision: unfunded gratuity and leave encashment provisions must be added back in the tax computation until paid.
Year-end payroll provision checklist
- Accrue March salary and any overtime, incentives or arrears earned but unpaid.
- True up the bonus provision to the final calculation for the year.
- Get the gratuity valuation with up-to-date employee data, including wages as defined in the Labour Codes, and book the service cost, interest and remeasurement.
- Update the leave provision from the leave balances at 31 March, actuarially if required.
- Reconcile each provision: opening balance + charge − payments = closing balance, and agree payments with full and final settlements.
- Prepare the tax adjustments for provisions not deductible until paid.
The wider definition of wages under the Labour Codes, in force since 21 November 2025, increased gratuity and leave obligations for many employers, because gratuity is now calculated on wages that may include part of the allowances. Employees' full and final settlements, which draw on these provisions, are explained in our full and final settlement guide.
Check the numbers behind your provisions. Use the free gratuity calculator and leave encashment calculator to work out what each employee is owed today.
Frequently asked questions
What is provision for salary?
Provision for salary is the common name for salary earned by employees in a period but not yet paid at the period end, such as March salary paid in April. It is recorded by debiting salary expense and crediting salary payable. Strictly it is an accrued liability rather than a provision, because the amount and timing are known.
What is the journal entry for salary provision?
At the period end, debit Salary account with the salary earned and credit Salary payable (often called provision for salary or outstanding salary). When the salary is paid in the next period, debit Salary payable and credit Bank.
Is salary payable a provision?
Not strictly. Under the accounting standards a provision is a liability whose amount or timing is uncertain enough to need estimation, such as gratuity. Salary payable is a known amount due within days, so it is an accrued liability, presented under other current liabilities by companies not on Ind AS, and under other current financial liabilities by Ind AS companies, even though many businesses label it provision for salary.
How is gratuity provision calculated for accounts?
Companies, whether following Ind AS 19 or AS 15, generally measure the gratuity obligation by actuarial valuation using the projected unit credit method. Certain smaller non-company entities with fewer than 50 employees may use a simpler method, such as assuming all employees leave at the year end. The provision is the obligation less any plan assets held in a gratuity fund.
Is provision for leave encashment tax deductible?
No, not when it is only provided. Under the Income-tax Act, 2025, leave encashment is deductible in the year it is actually paid. The provision is still required in the accounts; the difference is adjusted in the tax computation.
What is provisional salary?
Provisional salary is pay fixed temporarily until the final pay is settled, for example when a pay revision, promotion or pay fixation is pending. It is adjusted, usually through arrears or recovery, once the final pay is fixed. It is different from a salary provision in the accounts.
Position as of 15 November 2026. Based on Ind AS 19, AS 15 (Revised 2005), the Code on Social Security, the Code on Wages and the Income-tax Act, 2025. Examples are simplified; actuarial valuations depend on assumptions specific to each employer. General information, not accounting, tax or legal advice.