Friday, February 5, 2021

Additional Tax Deduction for Generating Employment - Section 80JJAA

The Income Tax Act, 1961 has a provision under section 80JJAA, by which an additional tax deduction is offered to businesses generating new employment during the year.

The section grants a deduction of 30% of additional employee cost incurred by the taxpayer for each of the 3 financial years starting from the year in which such employment is provided to new persons.

How is the deduction calculated?

Additional Employee Cost in the year = Rs. 1,00,000/-

Deduction allowed as expense for income tax calculation purposes:
Year 1 = Rs. 1,30,000/-
Year 2 = Rs. 30,000/-
Year 3 = Rs. 30,000/-

What kind of employees are considered as Additional Employees during the year for the purpose of this calculation of additional deduction?

"Additional Employee" means an employee who has been employed during the financial year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year.

Thus, if a business hires 30 new employees during the year, but 20 old employees leave, the additional employees are only 10.

Only the following category of employees are considered for the purpose of count in new employees:

1. Salary =< 25,000 p.m.: Whose total emolument is not more than Rs. 25,000 per month. Total emolument means all costs paid or payable to the employee by any name called.

Such emolument would not include any contribution paid or payable by the employer to any pension fund or provident fund or any other fund for the benefit of the employee under any law, or any lump-sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like.

2. PF Registered: Registered and contributing to a Recognized Provident Fund (PF). Those employees for whom the entire contribution is paid by the government under the Employees' Pension Scheme under the EPF Act are not covered. Casual workers are not covered.

3. Min. 240 Days: The employee is employed with the business for a minimum 240 days in the financial year. If an employee does not complete 240 days in a financial year, he may be considered as new employee in the next financial year when he completes these number of days.

For businesses in the operations of manufacture of apparel, footwear or leather products, the minimum number of days of employment is 150 instead of 240.

What are the other conditions necessary to be met by the business to avail this additional deduction?

1. Business Profits & Auditable: The assessee has income taxable under the head profits and gains from business and is subject to tax audit of books of accounts as per Income Tax Act.

2. Increase in No. of Employees: There is an increase in the number of employees in the relevant financial year when compared to the total number of employees employed as on the last day of the preceding year. And if it is the first year of the business' operations, emoluments paid or payable to employees employed during that year shall be deemed to be the additional employee cost.

3. Bank Payments to Employees: The emoluments paid to employees are by banking channels such as through bank transfer or an account payee cheque only. Cash payments to employees would make them ineligible for consideration in new additional employees.

4. No Reorganization of Existing Business: The business is not formed by splitting up or reconstruction of an already existing business, or is not a business acquired through transfer from another person or as a result of business organization

5. Audited Certified in Form 10DA: A Chartered Accountant would conduct a complete audit on the eligibility of such deduction and certify the additional deduction through an audit report filed online in Form 10DA.

What are the other important points relating to this deduction?

- Deduction u/s 80JJAA can be claimed in case of a belated return as well.
- This deduction is not location specific or industry specific, subject to other conditions.
- There is no upper limit on the extent to which such deduction can be claimed.
- The deduction is available for income from business, and not from profession.
- Businesses showing profit under presumptive income sections are excluded as tax audit is mandatory.