Tax Incentive to Business / Service sector/ Industry on salary of new employees
On Salary of Rs. 100/- avail tax benefit on Rs. 190/- :-
Any business / service sector/ manufacturing industry can claim additional deduction of 30% of salary paid to additional employees, subject to fulfilment of certain conditions. This deduction of 30% of the additional employee cost can be claimed for 3 years including the year in which such employment is provided.
Aggregate amount of the additional tax incentive in 3 years would be 90% of salary / emoluments paid to additional employees. It can be said that for each Rs. 100 paid of the salary, any business would be eligible to claim deduction of Rs. 190. This tax incentive is allowable u/s. 80JJAA of the Income Tax Act, 1961 in order to promote employment generation.
Page Contents
- 1. Who can claim this tax incentive under Section 80JJAA?
- 2. Amount of Deduction under Section 80JJAA?
- 3. What are the conditions required to be fulfilled to avail tax incentive under Section 80JJAA?
- 4. What are the procedural requirements or compliance which are to be done to avail tax incentive under Section 80JJAA?
- 5. A Company which has opted for taxation u/s. 115BAA @22% or where a new manufacturing company has opted for taxation u/s. 115BAB @ 15%. Whether such a Company can still claim deduction under section 80JJAA in respect of additional employee cost of additional employees?
- 6. An individual has opted for taxation as per Section 115BAC of the Act. Can he / she still claim deduction u/s. 80JJAA of the Act?
1. Who can claim this tax incentive under Section 80JJAA?
Any business / industry / service sector (Company / LLP / Partnership / Sole proprietorship, etc.) can claim this benefit if its books of accounts are audited U/s 44AB of Income tax Act. It is pertinent to note that a professional cannot claim deduction u/s. 80JJAA of the Act.
2. Amount of Deduction under Section 80JJAA?
30% deduction of salary / emoluments paid to additional employees, is deductible for current year and subsequent two years i.e. (for 3 years) including the year in which employment is provided. However, employer’s contribution to PF / Pension fund would not be included in salary.
3. What are the conditions required to be fulfilled to avail tax incentive under Section 80JJAA?
- Employment of any employee should result in increase in overall number of employees in the organization. (i.e. such employee should not be hired as a replacement on termination of services of another employee)
- Only those employees will be eligible whose salary is maximum upto Rs. 25,000 per month.
- Employee should participate in recognised Provident fund.
- Employee should be employed for a minimum no. of 240 days during a financial year. If an employee is not employed for 240 days in current year, but completes employment of 240 days in next year, he will be deemed to be employed in next year and deduction in respect of such employee can be claimed in the next year. (this condition of 240 days is 150 days in case of business of manufacturing apparel or footwear or leather products)
- Payment of salary should be done through banking channel (including online transfers and UPI payments) i.e. payment of salary should not be in cash or bearer cheque.
4. What are the procedural requirements or compliance which are to be done to avail tax incentive under Section 80JJAA?
Report from a Chartered Accountant certifying the amount of eligible deduction to the business in Form No. 10DA is required to be submitted electronically on or before the due date of furnishing Tax Audit Report (i.e. on or before 30th September) and the income tax return should be filed within the due date (i.e. 31st October). This new tax incentive is available since F.Y. 2016-17 (AY 2017-18), New Form No. 10DA has been notified vide Notification No. 104/2019 dated 18th December, 2019.
5. A Company which has opted for taxation u/s. 115BAA @22% or where a new manufacturing company has opted for taxation u/s. 115BAB @ 15%. Whether such a Company can still claim deduction under section 80JJAA in respect of additional employee cost of additional employees?
Yes. In order to promote employment generation, a Company which has already opted for taxation under section 115BAA or section 115BAB can claim this tax incentive under section 80JJAA.
6. An individual has opted for taxation as per Section 115BAC of the Act. Can he / she still claim deduction u/s. 80JJAA of the Act?
Yes. An Individual who has opted for alternative taxation u/s. 115BAC of the Act can also claim deduction u/s. 80JJAA.
Example 1:
| Total number of employees as on 31.03.2020 | 100 employees |
| New employees hired in FY 2020-21 | 15 employees |
| Employees whose services terminated in FY 2020-21 | 10 employees |
| Total number of employees as on 31.03.2021 | 105 employees |
The business would be eligible to claim deduction u/s. 80JJAA of 30% of salary paid to 5 Employees (105 – 100) since hiring of only 5 employees has resulted in increase in total number of employees. (i.e. 5 additional employees). 30% of the salary (salary paid to these 5 employees is Rs. 20000per month x 5employees x 12months=12,00,000 in f.y. 20-21) to these 5 employees in F.Y. 2020-21will be Rs. 3,60,000/- U/s 80JJAA and this Rs. 3,60,000/- will also be allowable deduction U/s 80JJAA in the F. Y. 21-22 & 22-23.
Same company had further given employment to 8 new employees in F. Y. 21-22, their aggregate salary in F.Y. 21-22 was Rs. 19,20,000 (20000x8x12) then for this new employment generation company will be allowed deduction U/s 80JJAA of Rs. 576000/- during F.Y. 21-22, in addition to the deduction of Rs. 360000/- in the F. Y. 21-22 U/s 80JJAA towards salary paid in F.Y. 20-21 being second year since new employment.
If in the F.Y. 22-23 there is no new employment by the company the deduction U/s 80JJAA in the F.Y. 22-23 will be Rs. 3,60,000/-+5,76,000/-= 9,36,000/- and in the F.Y. 23-24 deduction U/s 80JJAA will be Rs. 5,76,000/- only. If the company give further new employment to 3 new employees in F.Y. 24-25 then say, aggregate salary to new employees is Rs. 9,00,000/- in F.Y. 24-25 then Rs. 2,70,000 will be allowable deduction U/s 80JJAA and Rs. 2,70,000/- will also be allowable in F.Y. 25-26 & F.Y. 26-27 for the salary paid in F.Y. 24-25.
Example 2:
A new Startup company incorporated on 1st July, 2020 has hired 50 employees out of which 20 employees on 1st July, 2020 and further 30 employees on 1st December, 2020 (all covered under PF). Salary of each employee is Rs. 22,000 p.m paid through RTGS. What is the amount of deduction u/s. 80JJAA for FY 2020-21?
To claim deduction under section 80JJAA, the salary of employee should not be more than Rs. 25,000 per month, employee should participate in recognised PF, salary should be paid through banking channel and the employee should be employed for 240 days or more in the financial year. In FY 2020-21, the Startup Company would be eligible to claim deduction in respect of 20 employees hired on 1st July, 2020. i.e. amount of deduction = 30% of (Rs. 22,000 p.m. x 9 months x 20 employees) i.e. Rs. 11,88,000. The employees hired on 1st October, 2020 would not be covered u/s. 80JJAA since they have not completed employment of 240 days or more in FY 2020-21. Further, if such 30 employees complete 240 days in next year i.e. FY 2021-22, they shall be deemed to have been employed in FY 2021-22 and deduction u/s. 80JJAA can be claimed from FY 2021-22 onwards for 3 years as per second proviso to explanation (ii) of Sec. 80JJAA(2).
Conclusion:
This is great economic benefit to all business, industries and service sectors whereby they can avail the tax benefit on Rs. 190/- by spending Rs. 100 only. By claiming deduction under section 80JJAA, businesses can reduce their income tax liability.
In case of any queries, the author can be reached at [email protected] and 98270-36956.
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