The Government in order to promote employment generation activities, had introduced Section 80JJAA under Chapter VIA of Income Tax Act, 1961 which allows for deduction in respect of employment of new employees. In this article, provisions contained in the Section is discussed.
An assessee having income from business & to whom tax audit u/s 44AB is applicable.
Quantum of Deduction:
A deduction of an amount equal to 30% of additional employee cost incurred in the previous year.
Period of Deduction:
Deduction would be allowed for 3 Assessment years starting from the year in which employment is provided.
The deduction is available only subject to fulfilment of following conditions:
- The business should not be formed by splitting up or reconstruction of an existing business.
- The business is not acquired by way of transfer or as a result of business re organisation.
- The report of chartered accountant has to be furnished in Form 10DA along with return of income.
Meaning of Certain Terms:
1Additional Employee Cost: It refers to the total emoluments paid or payable to additional employees employed during the previous year. Further,
|In case of Existing Business||Additional Employee cost is nil, if:a) There is no increase in the number of employees from the number of employees on last day of year preceding previous year; or
b) Emoluments are not paid through banking channel i.e. paid in cash.
|In Case of New Business||The emoluments paid or payable to employees employed during the previous year shall be deemed to be additional employee cost.|
Additional Employees: means employees employed during the previous year & whose employment has the effect of increasing the total number of employees from the last day of year preceding previous year. But following employees are specifically excluded from the definition:
- Employees whose total emoluments are more than Rs. 25,000 per month;
- Employee whose contribution is paid by government under EPS;
- Employee who does not participate in Recognised Provident Fund (RPF);
- Employee employed for a period of less than 240 days in previous year (or 150 days in case assessee is engaged manufacturing of Apparel/ Footwear/ Leather Products).
In case where employee is engaged for less than 240 days (or 150 days) in previous year, but is employed for more than 240 days (or 150 days) in succeeding year. He shall be treated as additional employee from the succeeding year & deduction @ 30% is allowed from the succeeding year.
Emoluments: refers to any sum paid or payable to employee in lieu of employment (including allowances & perquisites), but does not includes:
- Any contribution made to any pension fund, provident fund or any other fund for the benefit of employee under any law; and
- Any lump-sum payment at the time of termination of service or voluntary retirement such as gratuity, leave encashment, severance pay etc.
Note: It is important to note that the new sections (115BAA, 115BAB, 115BAC, 115BAD) inserted to Income Tax Act provides for concessional rate of income tax for different assessees, subject to foregoing deductions under Chapter VIA. However, deduction under section 80JJAA is available to assessees opting for such lower rate of income tax.
Many of assessees are unaware or ignorant of this deduction available under Section 80JJAA. However, this section provides immense financial benefits for newly established businesses or existing business going for expansion.
Let us consider an example in which an assessee covered under tax rate of say 30% is having 50 employees during the previous year at a salary of Rs. 15,000/- per month, therefore assessee is paying net salary of Rs. 90,00,000/- during the previous year. Now, deduction equal to 30% i.e. Rs. 27,00,000/- is available under this section which will lead to a tax saving of Rs. 8,10,000/-. The deduction of Rs. 27,00,000 is an additional deduction from assessessed profits arrived after deducting Rs. 90,00,000 as salary costs.
From the above example, it is evident that there are huge tax savings for assesses claiming deduction under this section. Therefore, an assessee should always claim deduction under 80JJAA if the conditions specified in the section are met.
You can further read about benefits of Section 115BAB available on establishing new business: Section-115BAB