Hiring New Employees? Learn How to Claim Tax Deduction under Section 80JJAA

I. Introduction

Section 80JJAA of the Income Tax Act provides a tax deduction for businesses that hire additional employees. The section applies to businesses that are required to maintain books of account under section 44AB of the Income Tax Act, which includes businesses with a turnover above a certain threshold. Under the provisions of this section, businesses can claim a deduction of 30% of the additional employee cost incurred in the previous year, for three assessment years including the assessment year relevant to the previous year in which such employment is provided. This can result in significant tax savings for businesses that are looking to hire new employees.

II. Eligibility for the Deduction

In order to claim the deduction under Section 80JJAA, the business must be required to maintain books of account under section 44AB of the Income Tax Act. Additionally, the business must also meet the conditions specified in sub-section (2) of the section. These conditions include that the business cannot have been formed by splitting up or reconstruction of an existing business, unless it is re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B. The business also cannot have been acquired by the assessee by way of transfer from any other person or as a result of any business reorganization.

III. Calculation of Additional Employee Cost

The term "additional employee cost" is defined as the total emoluments paid or payable to additional employees employed during the previous year. Emoluments include 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 welfare of the employees. In the case of an existing business, the additional employee 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 or if 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. 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.

IV. Definition of Additional Employee

An "additional employee" is defined as 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 employees whose total emoluments are more than twenty-five thousand rupees per month, employees for whom the entire contribution is paid by the Government under the Employees' Pension Scheme, employees employed for a period of less than two hundred and forty days during the previous year or employees who do not participate in the recognized provident fund. However, for businesses engaged in the manufacturing of apparel, footwear or leather products, the minimum number of days of employment required for an employee to be considered as additional employee is 150 days. This is because the government is encouraging these sectors to increase employment.

V. Filing and documentation requirements

The section also requires the assessee to furnish the report of the accountant giving such particulars as may be prescribed before the specified date referred to in section 44AB. This report should contain details of the additional employee cost incurred, the number of additional employees hired, and any other relevant information as specified by the tax authorities. Failing to furnish the report or providing false information may result in penalties or disallowance of the deduction claimed.

VI. Conclusion

In summary, Section 80JJAA of the Income Tax Act provides a tax deduction for businesses that hire additional employees, with the amount of the deduction being 30% of the additional employee cost incurred. The section has certain conditions and restrictions, and businesses are required to furnish a report of the accountant giving prescribed particulars before the specified date. By understanding the eligibility criteria and calculation of additional employee cost, businesses can take advantage of this provision to reduce their tax liability. It is also important to note that the government is encouraging employment in certain sectors by providing special provisions such as lowering the minimum number of days of employment required for an employee to be considered as additional employee. This can be a great opportunity for businesses in those sectors to take advantage of the tax incentives and invest in their workforce. However, it is always recommended that businesses consult with a tax professional or accountant to ensure compliance with the rules and regulations under Section 80JJAA.