TAX INCENTIVE FOR EMPLOYMENT GENERATION – SECTION 80JJAA OF INCOME TAX ACT, 1961

TAX INCENTIVE FOR EMPLOYMENT GENERATION – SECTION 80JJAA OF INCOME TAX ACT, 1961

Section 80JJAA one of the deductions under the Income-tax Act, 1961 which is provided to incentivise industries to generate additional employment. The deduction provided under the said section, is aimed at encouraging the industry to generate employment across all sectors.

This article lays down the the conditions required to be satisfied to avail of the deduction.

PROVISIONS OF SECTION 80JJAA:

Who can claim the deduction– Any entity whose gross total income includes profit or gains derived from business and is subject to tax audit under section 44AB of the Act can claim the deduction under section 80JJAA of the Act. In case of taxpayers carrying on business, Section 44AB of the Act is applicable where the sales, turnover or gross receipts in business, exceed ₹. 1 Crore in the financial year.

Assessee not covered- Entity whose business is formed by splitting-up/reconstruction of existing business or when the business is acquired by way of transfer or under a business reorganisation.

What is allowed as the deduction – An amount equal to 30% of additional employee cost incurred in the course of business in the financial year is allowed as a deduction, for three consequent years including the year in which such employment is provided. This implies that in each of the three years the entity avails of a total deduction of 130% of the employee cost paid to the new employees.

Prerequisites for availing of the deduction – There must be an increase in the total number of employees on the last day of the financial year, when compared to the total number of employees employed as on the last day of the preceding financial year.

Meaning of additional employeeAn employee who has been employed during the 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 financial year. But does not include

  1. An employee whose total emoluments are more than ₹. 25,000.
  2. An employee for whom the entire contribution is paid by the Government under the Employee’s Pension Scheme notified in accordance with the provisions of the Employee’s Provident Funds and Miscellaneous Provision Act 1932.
  3. An employee who has been employed for a period of less than 240 days in the previous year. In case the assessee is engaged in the business of manufacturing of apparel then the minimum employment period is 150 days. However As per Finance Act 2018, following additional changes will be applicable for the financial year 2018-19: –
  • The limit of 150 days also applied to assessee engaged in the business of manufacturing of footwear or leather products.
  • Where an employee is employed during the previous year for a period of less than 240 days (or 150 days) but is employed for a period of 240 days (or 150 days) in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly.
  1. An employee who does not participate in the recognized provident fund.

To explain in layman terms, the emoluments paid to an “additional employee” shall be considered for computing the deduction, when

  • The individual is employed during the year, say during the financial year 2019-20.
  • The individual is on the payroll of the company on the last day of the financial year, i.e., on 31 March, 2020 and
  • There is an overall increase in the number of employees from the total number of employees employed as on the last day of the preceding year.

Emoluments  on which the deduction is computed  – Emoluments mean 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
  • 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.

Provided that emoluments are paid through banking channels only.

Meaning of Additional Employee Cost: Additional employee cost means total emoluments paid or payable to additional employees employed during the previous year.

In the case of an existing business, the additional employee cost shall be NIL in the following cases: –

  • 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;
  • 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:

Note: – In the first year of a new business, emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost.

RESTRICTIVE CONDITION: An organisation may have both kinds of employees i.e. ‘Additional Employees’ and ‘Other Employees’. One of the conditions for granting deduction under this section is that an increase in the number of ‘Additional employees’ should have the effect of increasing the number of employees employed by the employer as on the last day of the preceding year. It appears that any decrease in the number of “Other employees” would be considered while determining the increase in the number of “Additional employees”.

An assessee may believe that by increasing the number of “Additional Employees”, he would be entitled to the deduction u/s 80JJAA of the Act. But such belief would not be tenable if such increase is off-set by reduction in number of “Other employees” because section requires increase in ‘number of employees’ independent of the increase in ‘total number of employees’.

Therefore, it can be concluded that it is the net increase in number of “Additional Employees’ (after offsetting any decrease in the number of “Other employees”) which entitle an assessee to claim deduction under this section. Let us take following example

XYZ Pvt. Ltd. is incorporated on 25th April 2017 and engaged in the business of manufacturing cement. Company has 200 employees as on 31st March 2019.

The company employed 50 new employees during the financial year 2019-20 and 15 employees resigned before 31st March 2020.

Details                                                                                     Number of Employees

(a) Number of the employee as on 31.03.2020.                                             235

(b) Number of the employee as on the 31.03.2019.                                      200

(c) Increase in the number of the employee                                                     35

(d) Number of additional employees employed during the year                 50

(e) Number of the additional employee entitled for deduction                   35

i.e. not exceeding the number of increase in the number of employees as computed in (c).

Compliance requirement Rule 19AB of the Income-tax Rules, 1962 requires the employer to obtain Form 10DA from a practicing accountant reporting the said deduction and other information as mentioned therein. The form is required to be obtained before filing of the income-tax return for the said year.

The provisions of the Act clearly mention that no deduction shall be provided to the employer in case of non-compliance with filing of the said Form 10DA.

Compiled By CA Nitin J Shetty

Date : 20.12.2019