Section 80JJAA: Deduction For Employment of New Employees

Deduction under Section 80JJAA was introduced in the Finance Act, of 2016 by the former FM Arun Jaitley. Several deductions are available in the Income Tax Act, of 1961 among which Section 80JJAA is one important deduction.

This section provides a deduction for assessee who increase their workforce, allowing them to claim a deduction of 30% of the additional employee cost for three consecutive assessment years. An assessee can claim a deduction for hiring additional employees, thus encouraging employment and economic growth.

But the section was seen as misused. Employees were hired for short term to take the benefit of deduction and later were dismissed. To address this issue, the government of India established a requirement that an employee must be employed for a certain period before the claim as prescribed in the Income Tax Act, 1961.

Who are Referred to as Additional Employees?

Employees must constitute the following to be referred as Additional Employees;

1. Employees with not more than Rs,25,000 salary per month
2. Employment for more than 240 days in the financial year. (150 days for the businesses of apparel, footwear, and leather)
3. Employees must not be a participant of any Recognised Provident Fund 
4. Entire contribution of the employee must be paid under the Employees’ Pension scheme

What is Called the Additional Employee Cost?

Following is the Additional Employee Cost;

1. Total emoluments paid or payable to additional employees employed during the previous year.
2. In the case of an existing business, additional employee cost shall be NIL if;
3. No increase in employees from the total employees employed as of the last day of the previous year.
4. Emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by the use of an electronic clearing system through a bank account.
5. In the case of the first year of business, emoluments paid to employees employed during the previous year- are deemed to be additional employee costs.

Meaning of Emoluments and Exceptions to it

Sum payable to the employee in lieu of his employment.Bottom of Form

Exclusion-

1. Any contribution paid/payable by the employer to any pension fund/ provident fund/ any other benefit for an employee
2. Any lump sum payment paid/payable at the time of;
3. Termination
4. Superannuation
5. Voluntary retirement

Examples: Gratuity, severance pay, voluntary retrenchment benefits, leave encashment, commutation of pension, etc

Applicability of Section 80JJAA

1. Assessee to whom section 44AB is applied
2. Gross Total Income including Income from Business

Exceptions/ Who are not Eligible?

There are certain cases where deduction under the section 80JJAA is not available;

1. If the business is formed by splitting or reconstruction of existing businesses. However, it can be considered if formed by the circumstances and period as specified in Section 33B.
2. If the business is acquired by way of transfer from another person or by business re-organization.
3. Unless the assessee does not furnish the Form-10DA with the report of CA.

Quantum of Deduction

1. 30% of additional employee costs incurred.
2. For 3 Assessment Years including the assessment year relevant to the previous year in which employment is provided.

About FORM 10DA

Form 10DA is a form required by the Income Tax Department in India for claiming deductions under section 80-JJAA of the Income Tax Act.

Purpose: To claim deductions for additional employment in a business.

Due Date for Filing: Form 10DA should be filed online one month before the due date for filing your income tax return. For example, if the due date for filing the return is 31st October, Form 10DA should be filed by 30th September.

Digital Signature: A Digital Signature Certificate (DSC) is mandatory for filing Form 10DA.You cannot use the Electronic Verification Code (EVC) for this form.

Documents Required to Claim Deduction Under Section 80JJAA

To claim a deduction under any section some documents are required. Section 80JJAA requires the following;

• Form 10DA– This is the primary form that needs to be filed with the Income Tax Department to claim the deduction under section 80JJAA.
• Employee Details– Records like some basic information about the employee, employment contracts, and joining letters should be provided.
• Payroll Records– Records of the details of wages paid to the employee.
• Certification by CA- A certificate from a Chartered Accountant is needed to confirm that all the conditions have been fulfilled as specified under section 80JJAA.
• Proof of Compliance– Evidence of compliance with relevant labor laws and regulations, such as PF (Provident Fund) and ESI (Employee State Insurance) registrations, should be ensured.
• Additional Documents– Any other documents may be asked to present in case any further information is needed.

Proper documentation helps in smooth processing, thereby it is important to maintain all the documents required for a claim.

Impact of Claiming a Deduction Under Section 80JJAA

• Tax Benefits– The first and most important significance of this section is that an assessee can claim a deduction for the additional employees hired. A deduction of 30% of the additional wages paid to new employees can be claimed.
• Increased Employment– As to take the benefit, additional employees should be hired. Hence benefiting both the new employee and the assessee.
• Support For Small Businesses- Deduction benefits the small business to grow as they have limited resources and tax incentives help them grow without any kind of burden.
• Economic Growth– When the number of people gets employed it directly aids in the economic growth.
• Enhanced Skill Sets– When an assessee hires any employee, certain types of training are given to them making them more skilled and capable.
• Proper Maintenance of Records- To claim a deduction, accurate data is needed. So, the businesses maintain a proper record ensuring all the compliances, which is very important.

A Very Simple Illustration on Deduction

There were 2 additional employees on a salary of Rs,300000 annually thus leading to Rs,600000 as a total employee additional cost.

Deduction Available:

FY 2019-2020: 30% of 600000= 180000

FY 2020-2021: 30% OF 600000= 180000

FY 2021-2022: 30% of 600000= 180000

The Final Words

In conclusion, Section 80 JJAA allows assessee to claim a deduction of 30% of the additional employee cost for three consecutive assessment years. As the misuse of the section was seen, the Government imposed certain requirements that the businesses must meet.

This incentive is particularly beneficial for small businesses, as it helps them manage their tax liabilities while promoting job creation and economic development.

Visit https://taxeye.in/ for more insights on various sections of the Income Tax Act, 1961 and expert support for ITR filing.

Frequently Asked Question