All you need to know about Section 80JJAA

Entrepreneurs rejoice! Now save money by hiring! The Income Tax Act 1961 contains a provision under section 80JJAA to offer additional tax credits to businesses that create new jobs during the year. The section provides a deduction of 30% of additional employee costs incurred by the taxpayer for each of the 3 accounting periods beginning in the year in which such employment is provided to new persons. In this article, let us have a look at Section 80JJAA-Deduction on the cost of new and incremental employees.

What is tax deduction under Section 80JJAA?

The Government of India has introduced Section 80JJAA under Chapter VIA of the Income Tax Act, 1961. The main objective of this Act is to promote employment generation activities. The benefit for entrepreneurs is the possibility of deduction when employing new employees. This will help save income tax costs. Find more ideas for calculating income tax for employees here.

Section 80JJAA allows an employer to use tax credits or “Cashback” to pay wages to new employees it hires. These sops were first introduced in 2016 but were limited to only some specific assessees. Later, this section was amended through various finance laws to eventually enable almost every business to avail of the benefits or rather deductions under this section.

Eligibility to claim deduction under section 80JJAA

Deduction under Section 80JJAA can be claimed by taxpayers whose total income includes profit or gains from business. To be entitled to a deduction under Section 80JJAA, a taxpayer must meet all of the following conditions:

• The business should not have been created by the division or reconstruction of an existing enterprise. However, the business may have arisen as a result of re-establishment, reconstruction, or revival.
• The taxpayer should not have acquired the business by transfer from another person or as a result of the reorganization of the business.
• The taxpayer must file the Income Tax Return before the due date along with the Chartered Accountant’s report in Form 10DA.

What happens to tax deductions under Section 80JJAA?

• The provision deals with the provisions of Section 80JJAA of the Act. The amendment was introduced for the availability of the deduction in cases where the condition regarding employment (for a minimum number of days) is met in the following year of new employment.
• An employee is deemed to have been employed in the following year if any of the following applies:

• If the new employee is employed in the first year for a period shorter than the minimum,
• Meets the condition in the immediately following year

• Under the current ruling, to the years before the amendment, it appears that the deduction will only be available for the remaining years for which the condition is met. This is in contrast to the amended provisions, under which the benefit can be available for three years.
• It may be noted that the stated minimum period of employment which was earlier 300 days. Subsequently, the minimum period is now reduced to 240 days and in certain sectors to 150 days.

Who can be considered an additional employee?

Another employee means an employee who was employed in the previous year and whose employment results in an increase in the total number of employees employed by the employer as of the last day of the previous year, but does not include:

• An employee whose total emoluments are more than Rs 25,000 per month.
• An employee for whom the entire contribution is paid by the government as part of the employee pension system.
• An employee who was employed for less than 240 days in previous years. In the case of garment manufacturers, the minimum period of employment is 150 days.
• Any employee who does not participate in a recognized pension fund.

Importance of additional employee costs

Additional employee costs mean the total benefits paid or payable to additional employees employed during the previous year. The law states that in the case of an existing business, additional employee costs are zero if:

• There is no increase in the number of employees from the total number of employees employed on the last day of the previous year.
• Benefits are paid other than by payee check or payee draft or by ECS through a bank account. In the first year of business, benefits paid or payable to employees employed during that year will be treated as additional employee costs.

What other conditions must an entrepreneur meet to claim this additional tax deduction?

• Business profits and auditable: The assessee has taxable income under the head profits and gains from business and is subject to the audit of books of account.

• Increase in the number of employees: There is an increase in the number of employees in the relevant accounting period; compared to the total number of employees employed on the last day of the previous year. And if it is the first year of operation of the business; benefits paid or payable to employees employed during the year are considered additional employee costs.

• Bank payments to employees: Benefits paid to employees are only through bank channels, such as bank transfer or check to the payee’s account. Cash payments to employees would also make them ineligible for consideration for new additional employees.

• No reorganization of existing business: The business should not be created by dividing or reconstructing an already existing business. In addition, the business should not be acquired by transfer from another person or as a result of a business organization. Check out some ideas for a successful business transformation.

• Audited certified in Form 10DA: The Chartered Accountant would also conduct a complete audit of the eligibility of such deduction and confirm the additional deduction through an audit report filed online in Form 10DA.

• The higher tax deduction rate: The assessee would have to waive the computation of income tax at the reduced rate of tax under Section 115BAA.

Final words

In concluding remark, we can say that Section 80JJAA is a tool for claiming the deduction for the recruitment of new or additional employees. The section was made available in the Income Tax Act to encourage employers to hire new employees regularly. This Income Tax Act deduction can be claimed by all assessees for employment generation. The deduction under Section 80JJAA is aimed at generating employment in all sectors of the Indian economy.