Background

Section 80JJAA was introduced to provide incentives to industries to generate employment for semi-skilled and unskilled labours. It was amended by Finance Act, 2016 and again under Finance Act, 2018. We have summarized important provisions as below.

Eligibility for claiming deduction under 80JJAA

  • Assessee should be subject to tax audit u/s. 44AB of Income Tax Act and has profit or gains from business.
  • Business should not have been formed by splitting up or by way of reconstruction of an existing business. A business formed by re-establishment, reconstruction or revival by the assessee of the business u/s. 33B can claim this deduction.
  • Business should not be acquired by way of transfer from any other person or as a result of any business reorganization.

Amount of Deduction under Section 80JJAA

One can claim a deduction of an amount equivalent to thirty per cent of additional employee cost for three assessment years. This means that in each three years entity is eligible to claim the deduction of 130% of the employee cost paid to new employees.

Additional Employee Cost is the total emoluments paid or payable to surplus employees employed during the last year.

Additional cost shall be NIL, if:

  • 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 bank transfer

Additional Employee is an employee who has been employed during the previous 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 preceding year, but does not include:

  • an employee whose total emoluments are more than twenty-five thousand rupees per month
  • an employee for whom the entire contribution is paid by the Government under the Employees Pension Scheme
  • an employee employed for a period of less than two hundred and forty days* during the previous year
  • an employee who does not participate in the recognised provident fund

*In case of the business of manufacturing of apparel or footwear or leather products, two hundred forty days is substituted with one hundred and fifty days.

It has been clarified that where an employee has not been employed for a period as mentioned above in a financial year and completes the minimum period of employment in next financial year, he/she shall be deemed to have been employed in the succeeding financial year and benefit of this section can be taken accordingly.

Examples

XYZ Pvt. Ltd. is incorporated on 30th June 2015 and engaged in the business of manufacturing. It had 250 employees as on 31st March 2018.

a) During the financial year 2018-19, 70 new employees were employed and 20 employees (old and new) resigned before 31st March 2019. Employees as on 31st March 2019 will be as follows:

ParticularsNumber of Employees
a)      No. of employees as on 31st March 2019300
b)      No. of employees as on 31st March 2018250
c)       Increase in no. of employees for which additional employee cost will be deductible50

b) The company employed 15 new employees during the financial year 2018-19 out of which 5 resigned. Out of the existing employees, 20 employees also resigned during the year. Increase in the number of employees will be:

ParticularsNumber of Employees
a)      No. of employees as on 31st March 2019240
b)      No. of employees as on 31st March 2018250
c)       Increase in no. of employees for which additional employee cost will be deductible0

c) The company employed 600 new employees during the financial year 2018-19. Also, 60 old employees had resigned during the year:

GradeDate of Joining No. of employees employedNo. of employees resignedMonthly salary per employee
I01/04/201810015Rs.28,000
II01/05/201820012Rs.19,000
III01/01/201920016Rs.15,000
IV02/01/201910022Rs.7,000
 TOTAL60065 

Total additional employees employed during the year 2018-19 are as follows:

ParticularsNumber of Employees
a)      No. of employees as on 31st March 2019725
b)      No. of employees as on 31st March 2018250
c)       Increase in no. of employees475
ParticularsNumber of Employees
a)      No. of new employees employed during the year600
b)      Less: No. of employees having emoluments more than Rs.25000100
c)       Less: No. of employees not fulfilling the condition of 240 days300
d)      Less: No. of employees resigned out of new employees who are eligible (Grade II)12
e)      No. of additional employees for whom we can claim additional employee cost188

Additional employee cost eligible for deduction under section 80JJAA will be Rs. 1,17,87,600. (188 employees*Rs.19,000*11 months*30%).

Compliance Requirement

An employer is required to obtain Form 10DA from a practising CA for claiming the deduction. The form should be filled before filing an income tax return for that year.

Income tax return has to be filed on or before the due date specified under section 139(1) of the Act.

Issues that require more clarity from Tax Authorities

  • Does the threshold limit of days include leave period as well?
  • What will happen in case of upward revision of salary in year 2 or 3?
  • What is to be considered as emoluments? Whether bonus or non-monetary perquisites be considered for computation of emoluments and whether it is eligible for deduction?

High time to consider tax benefit u/s. 80JJAA

Considering the March end, this is high time to claim benefits under the Income Tax Act for the financial year 2018-19. Ascertain the tax benefit available for the financial year 2018-19 and obtain a certificate from a practising Chartered Accountant as per compliance requirement.

For more information on the subject, please get in touch with us.

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