In order to boost employment and to provide an additional incentive to Businessmen by way of a Deduction, this Section was introduced way back by the Finance Act, 1998. However, to generate employment as well as enable more categories of Assessees engaged in carrying on Businesses to take advantage of this Section, the Government has made a lot of changes and relaxations in the recent years. Let us understand this Section in detail. This section allows a deduction at a certain percentage for Salary paid to ‘New Employees’
Applicability
This Section is applicable to any Assessee (i.e., to Any Business Structure) having Profits and Gains from Business (Not Profession) AND to whom Tax Audit is applicable under Section 44AB of the Income Tax Act.
How much Deduction is available?
30% of “Additional Employee Cost” paid to “Additional employees” which resulted in an increase in the number of employees employed during the financial year for three consecutive years starting for the period in which the new employees were employed.
For example, if the “Additional Employee Cost” with respect to 30 “Additional Employees” of say Rs 60,00,000 is incurred by the Assessee in Financial Year 2018-19, then 30% of 60,00,000 which comes to Rs 18,00,000. This Deduction of Rs 18,00,000 [every year] is allowed for 3 consecutive financial years i.e., 2018-19, 2019-20, and 2020-21.
Conditions for availing the deduction
- The Business should not be formed by splitting up or reconstruction of an existing Business except in case where the revival or reconstruction has happened as a result of the circumstances mentioned and within the time specified in Section 33B.
- The Business is acquired by the Businessman by way of a transfer from another person or as a result of any Business Reorganisation.
- The Assessee must furnish an additional report from a Chartered Accountant on or before the Tax Audit Report Due Date.
Now let us understand, the meaning of the terms “Additional Employee” and “Additional Employee Cost” in detail.
What is “Additional Employee”?
Additional Employee means a new employee, who remains in employment for at least 240 days or more during the financial year which results in a net increase in the number of employees in the current year as compared to the last day of the preceding year.
For example: The total number of Employees in FY 18-19 was 200 and 50 more employees were hired in FY 19-20. 10 employees quit during the year. Also, out of the 50 employees newly hired, 35 worked for more than 240 days in FY 19-20. Thus, Additional Employees for FY 19-20 are 25 (35 who worked more than 240 days minus 10 who have quit during the year)
Note: If the new employee employed during the financial year works for less than 240 days or 150 days and they continue to remain employed for at least 240 days or 150 days in the succeeding year, then the Assessee shall be eligible for the Deduction in respect of such employees from the succeeding year.
Exception: In case of a Businessman carrying on the Business of Footwear, Apparel, or Leather products, the new employee must remain in employment for at least 150 days instead of 240 days during the financial year.
Additional Employee shall not include the following categories of employees
- Employees having Salaries of more than Rs 25,000
- Employees whose entire Contribution is paid under the Employee Pension Scheme notified by the Government
- Employees employed for less than 240 days or 150 days as the case may be during the financial year
- Employees not participating in Recognised Provident Fund
What is “Additional Employee Cost”?
In the case of an existing Business, Additional Employee Cost means the total Salaries paid or payable to the “Additional Employees” employed during the year.
Note: The Deduction is available only with respect to a net increase in the number of employees employed in the current year as compared to the last day of the previous year.
For example, if there were 100 employees on the last day of the previous year, 20 new employees were employed during the year and 10 employees left the organization in the current year, then the Additional Employees employed during the current year shall be only 10 and the Deduction with respect to Additional Employee Cost shall be available only in respect of the net increase in the number of employees which is 10.
Further, the Deduction is available only if the Salaries are paid by an Account Payee Cheque, Account Payee Draft, Electronic Clearing System, or any other prescribed electronic mode of payment.
Note: In case of a New Business i.e., in the first year, the entire Employee Cost paid shall be the Additional Employee Cost irrespective of the Mode of Payment. Thus, Deduction in respect of emoluments paid or payable in Cash in the first year to All the employees is fully allowed.
Salaries with respect to Additional Employee Cost shall not include:-
- An amount paid or payable in respect of Contribution to Pension Fund, Provident Fund or such other fund.
- Any lumpsum amount paid or payable at the time of termination of his service or superannuation or voluntary retirement such as gratuity, leave encashment, severance pay, retrenchment benefits, pension, etc.
Conclusion
Section 80JJAA is one of the most underrated yet significant and extremely relevant section under the Income Tax Law. Effectively speaking, by using this section, the government is giving you a deduction of 90% of the salary paid to the new employees in 3 years to minimize your tax liability, which is huge! However, there are some points that are unclarified and ambiguous under the Act, where the Law is silent. But with time, we do expect the required clarifications and explanations from the government.