Tax deduction of new employee cost under section 80JJAA

Learn about tax deductions for new employee costs under section 80JJAA of the Income-tax Act, its eligibility criteria, and practical scenarios for claiming deductions.

The Finance Act, 2016 has amended the provisions of section 80JJAA of the Income-tax Act, 1961 (Act) to provide for an additional deduction of additional employee cost incurred by the taxpayer subject to fulfillment of certain conditions. The said section was introduced and thereafter amended in 2016 with a view to encourage employment generation and providing incentives to all sectors. In general, it is beneficial to all sectors but most beneficial to industries that are labour intensive.

The deduction under section 80JJAA gains more importance now because it is available under the new tax regime as well as under the old tax regime. With the government looking to shift the taxpayers to the new tax regime, the deduction under section 80JJAA tends to go unnoticed as the general trend under the new tax regime is no tax deductions available to the taxpayer. Hence, one needs to be mindful of this section and try to avail the benefits if the prescribed conditions are fulfilled.

Quantum of deduction under section 80JJAA:

Section provides for a deduction of 30% of additional employee cost incurred in the course of business, for 3 assessment years including the assessment year relevant to the previous year in which such employment is done. In other words, if an employee is employed in FY 2022-23, other than the normal salary expense allowance, the employer would get an additional deduction of 30% of the additional employee’s salary for FY 2022-23, FY 2023-24 and FY 2024-25. However, the quantum of deduction in subsequent two years i.e. FY 2023-24 and FY 2024-25 will be fixed at the amount of deduction claimed in FY 2022-23. The employer cannot get additional benefit /deduction due to an increment in the employee’s salary. In a nutshell, the employer shall get a total deduction of 190% of the salary expense incurred in the first year of hiring a new employee.

Who is eligible to claim a deduction under section 80JJAA?

Any taxpayer whose gross total income includes any profits or gains from business and is liable to get his accounts audited u/s 44AB of the Act.

Conditions to be fulfilled for claiming deduction under section 80JJAA:

• The business is not formed by splitting up, or the reconstruction, of an existing business.
• The business is not acquired by the taxpayer by way of transfer from other person or by business reorganization
• Unless the taxpayer provides a report by a Chartered Accountant in form 10DA.

However, this deduction shall be allowed if the business is re-established, reconstructed or revived by the taxpayer under the following conditions:

• Any natural calamity like flood, typhoon, earthquakes, cyclone
• Riot or civil disturbance
• Accidental fire or explosion
• Action by an enemy.

Meaning of additional employee under section 80JJAA:

It means an employee employed during the previous year. But it doesn’t include the following employees:

• Whose salary is more than Rs. 25,000 per month
• Who is employed for a period of less than 240 days (150 days in case of business of manufacturing of footwear or leather products. )
• Who doesn’t participate in recognized provident fund
• To whom contribution is paid by the Government.

Meaning of additional employee cost under section 80JJAA:

It includes all emoluments paid or payable to an employee during the previous year.

In the case of existing business, this cost will be NIL if;

a. There is no increase in the total number of employees as compared to the total number of employees employed in the last year.

b. Emoluments NOT paid through account payee cheque or account payee bank draft or by use of electronic clearing system.

In case of new business, it will include all emoluments paid/ payable to employees in the first year.

Practical case scenario: If there are 100 employees as on 31 March 2022. As on 31.03.2023, there are 105 employees. During the year, 15 eligible additional employees have joined the employer and 10 old employees retired/resigned during FY 2022-23. So the employer can claim a deduction for 5 employees. Here, the employer can choose the highest-paid 5 employees out of the new 15 employees for the purpose of claiming a deduction.

Meaning of emoluments: under section 80JJAA

It includes all the sums paid or payable to the employee during the course of employment but does not include:

• Contributions payable by the employer to any pension fund, provident fund, etc.
• Sums paid to the employee at the time of termination of service/ voluntary retirement such as gratuity, leave encashment, voluntary retrenchment benefits and the like.

Form 10DA for claiming deduction under section 80JJAA:

• It contains a report to be filed by a Chartered Accountant that contains the details of the taxpayer and the amount of deduction that is claimed by the taxpayer.
• It is filed along with the return of income to be filed by the taxpayer.
• It has to be submitted online on the Income Tax website. A Digital Signature Certificate (DSC) is mandatory to file this form.

Conclusion:

The benefits of this section is generally skipped/missed by the taxpayers while filing the return of income. However, it is important to compute the deduction based on the afore-mentioned criteria and file the relevant details in Form 10DA to be certified by Chartered Accountants.

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Authors:

Karan Vakharia | Partner at MASD & Co | Email: karan.vakharia@masd.co.in | LinkedIn Profile

Nishika Acharya | Associate at MASD & Co | Email: nishika.acharya@masd.co.in