Section 80JJAA of Income Tax Act

Section 80JJAA of the Income Tax Act allows Indian companies to claim a tax deduction on the costs incurred for hiring new employees or staff during an assessment year. The Indian government has always focused on increasing employment. However, the country has long struggled with unemployment as many skilled citizens find it difficult to seek a job. The current unemployment rate in India is 9.2, which is high when compared to other countries. The Indian government, in its bid to increase employment in India, introduced section 80JJAA in the Income Tax Act 1961 to motivate Indian companies to hire more employees. Section 80JJAA allows Indian companies to claim a tax deduction on the costs they incur when hiring new employees.

If you operate a company in India, it is important that you know everything about section 80JJAA of the Income Tax Act. This blog will help you understand the provisions of section 80JJAA of the Income Tax Act and how you can lower your table income based on the eligible tax deduction.

What is section 80JJAA of the Income Tax Act?

Section 80JJAA of the Income Tax Act is a section of the Income Tax Act 1961 that provides tax deductions to eligible Indian companies and enterprises for the cost of hiring new employees. The main aim of the Indian government's offering such a deduction is to motivate Indian companies to contribute to formal sector employment in India and reduce the unemployment rate. Section 80JJAA of the Income Tax Act applies to an assessee in case of income from a business for the money spent on hiring new employees for the business during a fiscal year. Eligible enterprises can claim a deduction of up to 30% for three consecutive assessment years.

Also read: 44AD of Income Tax Act

What is the applicability of section 80JJAA under the Income Tax Act?

Section 80JJAA of the Income Tax Act allows a tax deduction to Indian companies on the expenses incurred to hire new employees. The deduction, which is capped at 30% on additional employee costs, allows eligible companies to reduce their taxable income. However, it is crucial that the below-mentioned conditions must be fulfilled to claim a tax deduction under section 80JJAA of the Income Tax Act:

Ownership requirement

Under section 80JJAA of the Income Tax Act, a company is eligible to claim a deduction only if it is fully owned by a single person. It should not have been split or purchased from another business.

Formation conditions

The business must not have been incorporated because of a corporate restructuring plan, and its establishment must not be because of re-building or mantling an existing business. However, businesses can claim a deduction in the event of revival, reconstruction, or re-establishment of the business.

Compliance and deduction

The assessee in question who owns the business and has incurred costs on employee hiring must file an Income Tax Return before the due date set by the Income Tax Department to claim a deduction under section 80JJAA of the Income Tax Act 1961. Furthermore, the assessee is required to submit a report from a registered Chartered Accountant in Form 10DA.

Also read: Section 140A of Income Tax Act

What is the eligibility under section 80JJAA?

Section 80JJAA of the Income Tax allows eligible Indian companies to claim 30% of the additional employee cost as a tax deduction. However, there are certain conditions that employers and employees must fulfil to be eligible for the deduction under section 80JJAA:

Employee eligibility

The employees hired by the company must not have a salary above Rs. 25,000. The company must have employed the employee or employees in question for more than 240 days in the previous year for which the deduction is being claimed under section 80JJAA. Lastly, employees must participate in a recognised Provident Fund.

Employee/Business condition

For employees or businesses who want to claim the expenses incurred on hiring the above-mentioned employees, their business must have operated for a minimum of 240 days in the previous year. The business must have employed a minimum of 10 employees in the previous year and should not have claimed any tax deduction under section 80JJAA of the Income Tax Act previously,

Also read: Income tax slab

What is the meaning of additional employees as per section 80JJAA?

Any employee apart from the employee that fulfils the below conditions falls under the additional employee meaning as per section 80JJAA of the Income Tax Act:

• An employee having a salary above Rs. 25,000.

• An employee employed by the company for less than 240 days in the previous year. The threshold limit is 150 days for companies manufacturing apparel, leather products, or footwear.

• An employee who has not participated in a recognised Provident Fund scheme.

• An employee for whom the Indian government has paid the entire contribution under the Employees Pension Scheme.

What is the additional employee cost as per section 80JJAA?

As per section 80JJAA of the Income Tax Act, additional employee cost refers to the total emoluments payable or paid to additional employees hired by an eligible business. However, there are some exceptions which make the additional employee cost as NIL. These are:

• The company has not hired any additional employees compared to last year. This means that the total workforce remains the same and makes the additional employee cost not applicable.

• If the company has paid emoluments to the new employees through modes other than an account payee draft or cheque or any other listed electronic modes (UPI, RTGS, NEFT).

Also read: 234B of Income Tax Act

What is the meaning of emoluments given in section 80JJAA?

Under section 80JJAA of the Income Tax Act, "emoluments" refers to the total compensation paid to new employees hired by the employer. This includes:

• Basic salary: The fixed, regular amount paid to employees, excluding bonuses and allowances.

• Allowances: Various allowances such as house rent allowance (HRA), conveyance allowance, etc.

• Perquisites: Any additional benefits provided to employees, such as company-provided vehicles or accommodation.

However, emoluments do not include:

• Any contribution made payable or paid by the employer to any Provident Fund, pension fund or any other employee-benefit fund.

• Any payment payable or paid as a lump sum by the employer in case of termination of services, voluntary retirement, or superannuation.

Deductions under section 80JJAA

Here are the deductions applicable under section 80JJAA of the Income Tax Act 1961:

• The deduction is allowed at 30% of the additional employee cost.

• The deduction can be claimed for up to three consecutive assessment years.

• The deduction is available to businesses engaged in manufacturing, production, processing, or assembly of products.

• The deduction applies only to new employees hired in addition to the existing workforce.

• The employees hired must not have a salary above Rs. 25,000.

• The business must be registered under the Miscellaneous Provisions Act 1952 and Employee’s Provident Funds.

Also read: 234C of Income Tax Act

Calculations under Section 80JJAA

Here is how the additional employee cost and the 305 tax deduction are calculated under section 80JJAA of the Income Tax Act:

Abstract Co., a manufacturing firm, started its operations in the fiscal year 2021-22. In this fiscal year, the company had an employee cost of Rs. 80 lakh and employed 45 individuals. For the financial year 2022-23, the company's total employee cost increased to Rs. 1 crore, with a workforce of 60 employees.

Here is how the additional cost of employees is calculated:

Additional employee cost = Total employee cost for FY 2022-23 – Total employee cost for FY 2021-22

= Rs. 1 crore – Rs. 80 lakh = Rs. 20 lakh

Now that the additional cost of an employee is calculated, here is how the tax deduction is calculated:

Deduction under section 80JJAA = 30% of the additional employee cost

= 30% of Rs. 20 lakh = Rs. 6 lakh

So, Abstract Co. can claim a tax deduction of Rs. 6 lakh under section 80JJAA of the Income Tax Act.

Also read: Income Tax Return Extended Date for FY 2024-25

80JJAA deduction for AY 2024-25

Under section 80JJAA of the Income Tax Act 1961, Indian companies can claim a tax deduction of up to 30% of the additional employee cost. Here are the conditions to avail of this deduction in AY 2024-25:

• The business should be fully owned by the owner and should not be a result of reconstruction or ownership of an existing business.

• The business must be registered under the Miscellaneous Provisions Act 1952 and Employee’s Provident Funds.

• The business must be involved in the manufacturing, production, processing, or assembly of products.

• The business must have hired additional employees in the previous financial year, and their salary must not exceed Rs. 25,000 per month.

• The company must have employed the employees for more than 240 days in the previous year.

Who Is Not Eligible to Claim Deduction?

Here are conditions that, if met, make the assessee ineligible to claim a tax deduction under section 80JJAA of the Income Tax Act:

• The business has been formed as a result of reconstructing or splitting up an already existing business.

• If the assessee has acquired or purchased the business through transfer as a result of business reorganisation.

• An assessee who has not filed the ITR before the due date, along with a CA report in Form 10DA.

Also read: Section 56 of Income Tax Act

Conclusion

The Indian government always aims to ensure that the unemployment rate in India is at the minimum. To encourage Indian firms to hire new employees every year, it introduced section 80JJAA in the Income Tax Act. Under section 80JJAA of the Income Tax Act, eligible Indian companies are eligible to claim 30% of additional employee costs as a deduction for the expenses made for hiring new employees. This can allow the business owner to significantly reduce the taxable income and pay less tax.

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