[Section 80JJAA] How to get Tax Deduction for Employment Generation

Entrepreneurs rejoice! Now you can save money by hiring! 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. 

What is the Tax Deduction under Section 80JJAA? 

The Government of India had introduced Section 80JJAA under Chapter VIA of Income Tax Act, 1961. The main objective of this is that it will promote employment generation activities. The benefit for entrepreneurs is that allows for deduction in respect of employment of new employees. This will help save income tax costs. For other ideas on income tax calculation for employees, take a look here.

Section 80JJAA enables an employer to enjoy tax sops or the “Cashback” for payment of salaries to new employees employed by him. These sops were first introduced in the year 2016 but were limited only to some specific assessees. Later on the section was amended through various Finance acts to ultimately allow almost every business to enjoy benefits or rather deduction under this section.

What is happening now with the Tax Deduction under Section 80JJAA?

  • The ruling deals with the provisions of Section 80JJAA of the Act. The amendment was introduced for availability of deduction in cases where the condition relating to employment (for minimum number of days) is satisfied in the next year of new employment.
  • An employee is deemed to have been employed in the succeeding year if any of the following are true:
    • If a new employee is employed in the first year for less than minimum period,
    • Satisfies the condition in the immediately succeeding year
  • As per the current ruling, with respect to years prior to amendment, it appears that the deduction will be available only for the remaining years for which the condition is satisfied. This is in comparison to the amended provisions whereby the benefit may be available for three years.
  • It may be noted that the specified minimum period of employment which was earlier 300 days. Subsequently, the minimum period now stands reduced to 240 days and, in specified industries, to 150 days.

What does this tax deduction mean for you?

With the Tax Deduction under section 80JJAA, your small business can get an additional deduction of 30% of additional employee cost incurred in the previous year, for three assessment years.

Hence, the total Benefit will be 90% including the assessment year relevant to the previous year in which such employment is provided.

How is the tax deduction under Section 80JJAA 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 tax 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, according to their hiring policy, 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 per month

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 tax deduction?

1. Business Profits & Auditable

The assessed has income taxable under the head profits and gains from business and is subject to audit of books of accounts. Take a look at this article to get ideas on profitable growth and cost reduction.

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 also make them ineligible for consideration in new additional employees. Consider using Asanify for automating the entire payroll process

4. No Reorganization of Existing Business 

The business should not formed by splitting up or reconstruction of an already existing business. Additionally the business should not be acquired through transfer from another person or as a result of business organization. Check out some ideas for successful business transformation.

5. Audited Certified in Form 10DA

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

6. Higher Tax Deduction Rate

The assessee would have to forego calculation of income tax under the reduced tax rate under Section 115BAA.
For more insights, check out this podcast episode with Sarthak Ahuja

What are the other important points relating to this tax deduction?

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

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.