Section 80JJAA of the Income Tax Act offers a tax deduction to businesses when they incur additional costs upon employing new workers. Specifically, it allows a 30% deduction of the additional employee cost for three consecutive assessment years. However, to qualify, the employees must remain in employment for a minimum of 240 days in a year (150 days for the manufacturing sector).
Primarily, this deduction encourages employment generation and is particularly helpful for businesses looking to expand their workforce. Let’s understand some key provisions of this section in detail, learn the different eligibility conditions, and check how to calculate the deductions offered.
What is section 80JJAA of the Income Tax Act?
Section 80JJAA of the Income Tax Act is designed to motivate businesses to create new jobs in the formal sector. This section allows employers to claim a deduction of 30% of the additional employee cost incurred for hiring new eligible employees. This deduction starts from the year in which new employment is provided and can be claimed for three consecutive assessment years.
However, to qualify, the new employees must be employed for at least 240 days during the year (150 days for the apparel, leather, and footwear manufacturing sector). This deduction applies only if the businesses:
- Are required to get their books of accounts audited
- File their income tax returns on time
Additionally, the employees must have been employed in the previous year and should contribute to an increase in the overall number of employees. By offering this deduction, Section 80JJAA:
- Encourages businesses to expand their workforce
- Promotes job creation
- Provides more opportunities in the formal sector
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What is the applicability of Section 80JJAA under the Income Tax Act?
Section 80JJAA of the Income Tax Act allows businesses to claim a tax deduction of 30% of the additional employee cost. To qualify for this deduction, businesses must meet several conditions:
Ownership requirement
The business must be solely owned. It must not be acquired or created by splitting or restructuring an existing business.
Formation conditions
The business cannot be formed by dividing or reconstructing an existing entity. However, a re-established business is eligible for deduction under Section 80JJAA.
Compliance and deduction
The business must file its Income Tax Return (ITR) on time. Additionally, a Chartered Accountant (CA) must certify the claim by submitting Form 10DA.
What is the eligibility under Section 80JJAA?
To claim a deduction under Section 80JJAA of the Income Tax Act, businesses must fulfil these conditions:
Employee eligibility
- The monthly salary of employees should not exceed Rs. 25,000.
- The employee must be employed for more than 240 days during the year (150 days for the apparel, footwear, or leather manufacturing sector).
- The employee should be part of a recognised Provident Fund.
Employer/business conditions
- The business must have been operational for at least 240 days in the previous year.
- The business hired a minimum of 10 new eligible employees in the previous year.
- The business should not have claimed this deduction previously under Section 80JJAA for the same employees.
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Deductions under Section 80JJAA
Section 80JJAA allows businesses to claim a tax deduction of 30% on the additional employee costs incurred. This deduction can be claimed for three consecutive assessment years, starting from the year when the additional employees are hired. For the purposes of this section, the additional employee cost is calculated as the difference between the total employee cost in the current fiscal year and the previous fiscal year.
Now, to accurately determine additional employee costs, businesses must consider the following parameters:
- The employee's total salary should not exceed Rs. 25,000 per month.
- The employee must have been employed for more than 240 days in the previous year.
- The employee should be part of a recognised Provident Fund.
- The government should not have paid the entire contribution of the EPF scheme to the employee.
Furthermore, a business is eligible to claim a deduction under Section 80JJAA upon meeting these conditions:
- The business must have been operational for at least 240 days in the previous year.
- The business should have employed at least 10 new eligible employees in the previous year.
- In the previous year, the business should not have availed any deduction under Section 80JJAA for those employees.
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Calculations under Section 80JJAA
For more clarity, let’s study a hypothetical example showing how the deductions are calculated.
Say XYZ Ltd. is a software development company that began operations in the financial year 2022-23.
- In FY 2022-23, the total employee cost of the business was Rs. 60 lakh, and the company had 150 employees.
- In FY 2023-24, XYZ Ltd. hired an “additional 50 employees” and paid them a total of Rs. 20 lakhs.
Now, it can be observed that the additional employee cost of XYZ Ltd. in FY 2023-24 is Rs. 20 lakhs. The eligible deduction under Section 80JJAA is 30% of the additional employee cost, which amounts to 30% of Rs. 20 lakh = Rs. 6 lakh.
This implies that starting from FY 2023-24, XYZ Ltd. can claim Rs. 6 lakh as a deduction under Section 80JJAA.
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80JJAA deduction for AY 2024-25
Section 80JJAA of the Income Tax Act allows eligible businesses to claim a deduction for hiring new employees during Assessment Year (AY) 2024-25. A deduction of 30% of the additional employee costs can be availed for three consecutive assessment years, starting from the year the new employees are hired.
Hence, if an eligible business has hired new employees in the AY 2024-25, it can claim a deduction for
- AY 2024-25 (the year of new hire)
- AY 2025-26, and
- AY 2026-27
This means over the three years, the total tax benefit can add up to 90% of the additional employee costs. However, the following conditions must be met to claim a deduction under Section 80JJAA:
- The business must be involved in manufacturing goods or producing articles as specified.
- In the previous year, the business hired more employees.
- The salary of the new employees should be less than Rs. 25,000 per month.
- The new employees should have worked for at least 240 days in the previous year.
- The business should be registered under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.
- The business should not be formed by transferring ownership or restructuring an existing business.
Who is not eligible to claim a deduction?
It is worth mentioning that only eligible businesses are allowed to claim a deduction under Section 80JJAA. Let’s check out some cases where the deduction is not allowed:
- If the business is formed by reconstructing an existing business or splitting up, it is not eligible. However, a business formed due to revival or re-establishment by the assessee is eligible.
- If the business is acquired by the taxpayer as a result of any business reorganisation, the deduction cannot be claimed.
- The business must submit a report from a Chartered Accountant before the specified date to claim the deduction. Failure to provide this report disqualifies the business from the deduction.
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Conclusion
Section 80JJAA provides tax deductions to encourage job creation and promote economic growth. Also, this provision encourages businesses to expand their workforce. However, it is important to note that these deductions are not available for businesses in the service sector. Only eligible production-based businesses can claim the available deductions.
To qualify, such businesses must ensure that they meet all the stipulated conditions, such as not being formed through splitting or reconstruction, not acquiring the business through reorganisation, and submitting Form 10DA. All such eligible businesses can avail of a 30% deduction on additional employee costs for three consecutive years, starting from the year, the new employees are hired.
