Section 80JJAA - Deduction in Respect of New Employees Recruited

Section 80JJAA of the Income Tax Act, 1961 is a tax incentive for employment generation and provides for deduction from INCOME FROM BUSINESS of an assessee for the employment of new employees by the assessee. This deduction is provided in order to promote employment generation in the country. This deduction if claimed, can provide deduction upto 190% of the expenses incurred towards salaries and wages paid to the new employees. 

WHO CAN CLAIM DEDUCTION U/S 80JJAA?

• Any entity whose GROSS TOTAL INCOME includes PROFIT OR GAINS derived from any BUSINESS. Therefore, the deduction is not available to an assessee carrying on any profession. And
• Entity who is subject to TAX AUDIT under SECTION 44AB of the Act. And
• The assessee incurs ADDITIONAL EMPLOYEE COST which results in an increase in the total number of employees (ADDITIONAL EMPLOYEES) employed as at the end of the previous year as compared with the immediately preceding previous year.

But there are certain entities which satisfy the above conditions but cannot claim deduction under 80JJAA. No deduction is allowed if:

1. A person is having receipts from profession.

2. If the business is formed by splitting up, or the reconstruction, of an existing business.

However, this condition shall not apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B. Section 33B specifies the following circumstances where the business of any industrial undertaking carried on in India is discontinued in any previous year by reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by the assessee and used for the purposes of such business as a direct result of—

(a) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(b) riot or civil disturbance; or
(c) accidental fire or explosion; or
(d) action by an enemy or action taken in combating an enemy (whether with/ without a declaration of war)
and such business is re-established, reconstructed or revived by the assessee, within a period of 3 years from the end of the previous year in which such business is discontinued

3. If the business is acquired by the assessee by way of transfer from any other person or as a result of any business re-organization.

4. If assessee fails to furnishes along with the return of income the report of the chartered accountant, as defined in the Explanation to section 288 i.e., Form 10DA electronically.
Rule 19AB of the Income Tax Rules, 1962 specifies that the report of an accountant which is required to be furnished by the assessee along with the return of income under clause (c) of sub-section (2) of section 80JJAA shall be in Form No.10DA. From AY 2020-21, the report in Form 10DA shall be required to be furnished by the assessee at least one month prior to the due date of filing of return of income prescribed u/s 139(1).

5. An employer who is not registered with EPFO or has no RPF trust of its own cannot have employees who can participate in EPF.

Note: This deduction is applicable to that assessee also who has opted to pay taxes under section 115BAA, section 115BAB, section 115BAC and section 115BAD.

MEANING OF ADDITIONAL EMPLOYEES FOR SECTION 80JJAA

According to section 80JJAA, "ADDITIONAL EMPLOYEE" means an employee who has been employed during the previous 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, but does not include, -

• An employee whose TOTAL EMOLUMENTS are more than Rs. 25,000 p.m.; or
• An employee for whom the ENTIRE CONTRIBUTION is paid by the GOVERNMENT under the Employees' Pension Scheme notified in accordance with the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952; or
• An employee employed for a period of less than 240/150* days during the previous year; or
• *An assessee who is engaged in the business of manufacturing of apparel or footwear or leather products the additional employee shall be required to be employed for a period of at least 150 days and in other cases 240 days.
• An employee who does not participate in the RECOGNISED PROVIDENT FUND; or
• CONTRACTUAL EMPLOYEES, PART-TIME EMPLOYEES and CASUAL WORKERS do not participate in the provident fund scheme and hence are not eligible for deduction.

Note: If the employee joined late during the year and his 240/150 days get completed in next year, then this employee will be counted as a newly recruited employee in the next year.

EXAMPLE: ILLUSTRATION ON ADDITIONAL EMPLOYEE

A Ltd. has the following data on joining of various employees during the FY 2021-22 (AY 2022-23). Total employee strength of A Ltd. as on 31.3.2022 was 100.

MEANING OF ADDITIONAL EMPLOYEE COST FOR SECTION 80JJAA

According to section 80JJAA, "ADDITIONAL EMPLOYEE COST" means TOTAL EMOLUMENTS PAID OR PAYABLE to additional employees employed during the previous year.

In case of an EXISTING BUSINESS, the additional employee cost shall be NIL, if-
(a) there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year;
(b) emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account or such other electronic mode as may be prescribed.

In case of a NEW BUSINESS, in the first year, emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost.

The Note No. 3 Form 10DA issued under Rule 19AB also states that "the amount shall be nil if the emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by way of an electronic clearing system through a bank account". Thus, only those payments will be included which have been made through banking channel or electronic mode (ECS) i.e. Account Payee Cheque, RTGS, NEFT, IMPS, UPI, Net Banking etc.

MEANING OF EMOLUMENTS FOR SECTION 80JJAA

As per Section 80JJAA, "EMOLUMENTS" means any sum paid or payable to an employee in lieu of his employment by whatever name called, but does 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 for the time being in force; and
• 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.

Note: Certain organizations pay the leave encashment at the end of every year whereas some employers pay the accumulated leave at the time of resignation or retirement. Where the same is paid annually, the same shall constitute 'emoluments' and if the same is paid at the time of leaving the organization, the same shall not be treated as emoluments.

Typically, the following shall be counted towards emoluments-
1. Basic pay, D.A.
2. Other monthly allowances like HRA, conveyance allowance, special allowance, etc. (If an allowance is partly/ wholly exempt under income Tax Act, then the Gross Allowance shall be taken as Emoluments.)
3. Bonus/Ex-Gratia even if paid annually
4. Performance bonus, variable pay
5. Reimbursements will not be included like medical reimbursement, LTC on actual travel, etc.

QUANTUM OR AMOUNT OF DEDUCTION UNDER SECTION 80JJAA

Section 80JJAA provides for deduction of an amount equal to 30 PERCENT of ADDITIONAL EMPLOYEE COST incurred in the course of such business in the previous year, for 3 ASSESSMENT YEARS including the assessment year relevant to the previous year in which such employment is provided subject to fulfilment of conditions specified in section.

The quantum of deduction will remain constant for all the three years, despite subsequent changes in employment status or salary levels. For instance, the amount of deduction claimed in the first year would remain constant in subsequent two years, even in case some employees including the employees in respect of whom the additional deduction is claimed, leave the organization or the salary of such employee crosses the ceiling of Rs. 25,000 p.m.

FREQUENTLY ASKED QUESTIONS

1. Whether the condition of emoluments being Rs. 25,000 p.m. shall be seen at the time of joining of the employee or till the period of 240 working days or till the last day of the previous year. This assumes significance if the employee is given increment in between the first previous year from his date of joining. OR 

Whether the words 'more than INR 25,000 per month', can be construed to mean 'more than INR 300,000 per annum? 

The most rational view is that the emoluments paid or payable to the new employee from the date of his joining to the last day of the previous year shall be taken and then the same is averaged out to get the monthly emoluments to determine an eligible additional employee.

Note: This average monthly emolument is computed to compare the same with the Rs. 25,000 conditions. However, it should be noted that Additional employee cost cannot exceed Rs. 3,00,000/- per additional employee in a previous year.

2. NON-APPLICABILITY OF TAX AUDIT IN SUBSEQUENT YEARS:

If in the first previous year when the assessee incurred additional employee cost the assessee is subject to tax audit under the provisions of section 44AB and other conditions are fulfilled and hence the assessee is allowed 30% of additional employee cost in the first previous year. In the subsequent year, the assessee is not liable to tax audit due to any reason then in that case, he cannot claim any new or fresh deduction in the subsequent year but he can continue to claim the remaining 60% deduction in two years @ 30% per year which he claimed in the first year. This is because the conditions for claiming deduction u/s 80JJAA were attached for the first year and not for claiming balance deduction in the subsequent year.

3. PERSON OPTING PRESUMPTIVE TAX SCHEME U/S 44AD

A person (individual, HUF or firm) if opts for section 44AD then he cannot claim deduction u/s 80JJAA since section 44AD prohibits claiming of any deduction under any provisions of Chapter VIA under the heading "C". - Deductions in respect of certain incomes" and section 80JJAA is placed in the Part-C of Chapter VI-A.

4. HIGHEST PAID ADDITIONAL EMPLOYEES MAY BE CHOSEN

Consider a case where there are 100 employees as on 31.03.19. As on 31.03.2020, there are 105 employees. During the year, 15 eligible additional employees have joined the employer and 10 old employees retired/resigned during FY 2019-20. So the employer can claim deduction for 5 employees. Suppose out of 15 employees, 7 were employed at a monthly pay of Rs. 10,000/- and 8 were employed at Rs. 15,000/-. In this case, the employer may opt for additional employee cost at Rs. 75,000/- (Rs. 15,000*5). The period of employment should also be taken into consideration to get maximum benefit.

5. Whether deduction shall be available in case of an employee, if he leaves the organization in the second or third year? In other words, whether the deduction computed in the first year is standard deduction or whether the amount of deduction can change in the second and third year on the basis of employees leaving the organization?  OR 

What happens in case of upward revision of the salary of the additional employee? What if an employee receives total emoluments of INR 25,000 or less in the first year, but in year 2, the salary is revised such that pay-outs to the employee are more than INR 25,000 per month? Does the deduction lapse or would continue? OR 

Is it mandatory for an employee to be present in subsequent years in which deduction under Section 80JJAA is claimed? OR 

Deduction under Section 80JJAA a standard deduction or needs to be revisited in subsequent FYs?

The provisions of section 80JJAA do not specify any conditions in relation to the continued employment of the additional employees in subsequent two financial years. Accordingly, it can be inferred that even if the employee leaves the organization in the second or third year, the amount of deduction computed in the first year shall remain unaffected. This view is supported by the decision of the Bangalore Tribunal in the case of DCIT v. Page Industries (ITA Nos. 1231 to 1233 of 2014).

6. WHETHER ACCRUED BONUS WILL BE INCLUDED IN COMPUTING THE EMOLUMENTS PER MONTH?

Yes, as the words used in definition of "emoluments" are "paid or payable". The provisions of Payment of Bonus Act would also have to be borne in mind.

7. Is it mandatory for an employee to be present as on the last date of the previous year, in order to be eligible for deduction under Section 80JJAA? OR 
If employee satisfies every condition but left the organization on last day of year: 

One of the conditions is that the additional employee must be employed for a minimum period of 240 days in the previous year. Though employed for more than 240 days but if he resigns on or before the last day of the previous year, there is no benefit of deduction. 

8. Whether employees covered under Pradhan Mantri Rojghar Protsahan Yojana eligible for deduction under Section 80JJAA? 

As under this scheme, ESI and EPF have been paid by the government. Thus, those employees will not be included if any of the payments related to services provided by the employee have been paid by the government.

9. Suppose a company/entity has losses in year 1, whether deduction under Section 80JJAA be claimed in year 2 and year 3 with respect to employees employed in year 1?

An entity can claim the portion of deduction in year 2 and year 3 if in year 1 company has losses but have profits in year 2 and year 3.

10. Suppose an entity is registered Under ESIC but have not registered under any recognized Provident fund whether deduction under Section 80JJAA can be claimed?

This is the pre-requisite of this section that an entity needs to be registered with any of the recognized provident fund. Therefore, if any entity is not registered with the same then that entity will not be eligible to claim the deduction u/s 80JJAA.

11. Suppose an entity is not registered under recognized provident fund on first day of previous year but got registered during the year whether deduction can be claimed on that portion of salary against which EPF have not been paid to the government?

This is the pre-requisite of this section that an entity needs to be registered with any of the recognized provident fund. Therefore, if any entity is not registered with the same then that amount for which EPF has not been paid will not be considered while calculating Additional Employee Cost.

12. Whether an employee treated as an additional employee during a Financial Year can again be counted as an additional employee during any other Financial Year?

No. Employee who was treated as an additional employee during a Financial Year can again be counted as an Additional Employee during any other Financial Year.

13. Whether New Partner's salary can be included in calculation of an Additional Employee cost for a Firm?

No, New Partner's Salary cannot be included in calculation of an Additional Employee Cost for a Firm as he/she doesn't constitute as an Employee in the Firm.

14. Whether monthly emoluments are to be calculated for every 30 days of employment or for every calendar month?

Monthly Emoluments needs to calculated for every calendar month.

15. Does the threshold limit of 240/150 days include any leaves taken in between?

The limit is checked from the perspective of the date of joining and date of leaving thus, any leaves taken will not be included while checking 240/150 days limit.

16. In case where employees have joined as well as a few old employees left the Business, how the Assessee will calculate the Additional employee cost? For ex- Say 100 Employees were employed at start of the year. 15 Employees joined during the period Apr to Jun of the financial year. 10 Employees left on 01st Jan of the financial year. All employees joined as well as left have a different salary structure, but all satisfy the Rs 25000 condition. Net employee strength as on 31st march is 100+15-10=105 employees. Hence, here net new employees = (105-100) = 5. Therefore, section allows deduction of Additional Employee cost of only 5 new employees out of 10. But the question is how to select these 5 employees – on period of service basis, on salary basis, or any other criteria beneficial to the assessee?

As such there is no criteria defined to select the additional employees and claim the deduction against them.