Deduction under section 80JJAA of Income Tax Act, 1961

The Income Tax Act, 1961, Chapter VIA discusses the deductions that must be made in order to calculate total income. It is divided into three parts-

A-		General
B-		Deductions in respect of certain Payments
C-		Deductions in respect of certain Incomes

Section 80JJAA comes under Deductions in respect of certain Incomes.

According to this chapter, an assessee entire income is allowed from his gross total income, and the total amount of deductions is never allowed to exceed the assessee gross total income.¹

Tax deductions are claims made to lower taxable income resulting from a taxpayer’s various investments and costs. As a result, income tax deductions lower taxpayer’s overall tax payment. It is a type of tax incentive that allows taxpayers to save money. However, how much tax one can save is determined by the sort of tax benefit taxpayer’s claims.

‘Tax Deduction’ and ‘Tax Exemption’ both the terms relate to a reduction in taxable income; they are examples of government-provided tax relief or tax benefits. Tax exemptions, on the other hand, can include full tax relief, lower rates, and taxation on only a selected amount of income. A tax exemption indicates that you do not have to pay taxes on a specific income.

Section 80JJAA of the Income Tax Act is referred to as the deduction in which taxpayers can claim payments made to the most recent and incremental employees in the previous year. Any taxpayer who earns income from a business and is subject to tax under Section 44AB of the Income Tax Act of 1961 should take advantage of the same deduction.

Section 80JJAA encourages firms to create new jobs in the formal sector and offers qualifying workers employment benefits. The government hopes to lower the unemployment rate in the nation by encouraging firms to recruit more workers by offering a tax exemption.

What is Section 80-JJAA?

Section 80JJAA, a provision within the Indian Income Tax Act of 1961, aims to provide tax deductions to employers contributing to formal sector employment. This deduction pertains to Income From Business and is applicable to individuals or entities who have hired additional employees in a given fiscal year.

WHO IS NOT ELIGIBLE FOR DEDUCTION U/S 80JJAA

No deduction under sub-section (1) shall be allowed,—

(a) if the business is formed by splitting up, or the reconstruction, of an existing business:

Provided that nothing contained in this clause shall apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B;

(b) if the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganisation;

(c) unless the assessee furnishes the report of the accountant, as defined in the Explanation below sub-section (2) of section 288, before the specified date referred to in section 44AB giving such particulars in the report as may be prescribed3.

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

It means an employee who has been employed during the previous year but does not include the following:

Employees whose total salary is more than Rs. 25,000/- per month.
Employees who were employed for less than 240 days in the previous year (150 days in case of manufacture of apparel or footwear or leather products)
Employees who do not participate in Recognised Provident Fund like casual workers, etc.
Employees whose entire contribution is paid by the Government under the Employees’ Pension scheme

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

There is no increase in the total number of employees, which means the total no of employees joined during the previous year is equal to the total number of employees left during the previous year.
Example:
Particular No. of Employees
Total No. of employees as on 01 April 2019 100
No. of employees joined during the year 20
No. of employees left during the year 20
Total No. of employees as on 31 March, 2020 100
In the above example, there is no increase in the total number of employees, hence not eligible to claim deduction in this case.
In the above example, if no. of employees joined was 30, then in that case, a deduction of employee cost for an additional 10 employees will be available.
Emoluments are paid otherwise than by A/c payee cheque or account payee draft or any prescribed electronic mode ( like RTGS, NEFT etc).
Example: A Ltd incorporated on 01 Apri, 2019 and employed 20 employees. Total emoluments paid during the year amounting Rs. 10 Lakhs, which is paid in cash.
In the above case, deduction u/s 80-JJAA is available even if emoluments are paid in cash because A Ltd is a new entity.

Particular	No. of Employees
Total No. of employees as on 01 April 2019	100
No. of employees joined during the year	20
No. of employees left during the year	20
Total No. of employees as on 31 March, 2020	100

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

a) 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;

(b) Any lump-sum payment paid or payable to an employee at the time of

Termination of his service or
Superannuation or
Voluntary retirement

What are the conditions to claim deduction u/s 80-JJAA?

Section 80JJAA in the Income Tax Act pertains to tax deductions related to business profits and gains. This section enables a deduction of 30% on increased employee expenses for a continuous period of three assessment years.

To claim the deduction under this section, following conditions need to be satisfied:

The assessee must have Income from the Business Head, and he is liable to get his accounts audited as per the requirement of section 44AB along with a report of a CA in Form 10DA.
It should be a new business. It should not be formed by splitting up or reconstruction of an existing business.
Business is not acquired by way of transfer from any other person.
Deduction should be claimed in the income tax return.

What is deduction under Section 80-JJAA?

Employees should earn a monthly salary not exceeding Rs. 25,000.
They must have worked for more than 240 days in the preceding year.
Employees should be affiliated with a recognized Provident Fund, including casual workers, etc.
The Government should not have covered the entire EPF scheme contribution for the employees.

To qualify for a deduction under Section 80JJAA for your business, the following prerequisites should be met:

Your business should have been in operation for a minimum of 240 days in the previous year.
It should have employed at least 10 individuals during that year.
No deduction under Section 80JJAA should have been claimed by the business in the previous fiscal year.

If the assessee satisfies all the conditions, then he is eligible to claim a deduction as given below:

30% of additional employee cost for 3 consecutive years

Example of section 80-JJAA

ABC Ltd., an existing company appoints following employees during the F.Y. 2018-19

Case	No. of employees	Date of appointment	Salary (in Rs. per person per month)
1	10	30-April-2018	25,000
2	15	01-June-2018	28,000
3	20	01-March-2019	24,500

Calculation of amount of deduction

Case	Total salary (Rs.)	Amount of deduction
Case 1	27,50,000	(30% of 27,50,000) 8,25,000
Case 2	42,00,000	Nil
Case 3	4,90,000	Nil
Total deduction		8,25,000

Case 1 : In this case, assessee is eligible to claim the deduction since additional employees were employed for more than 240 days and salary is not more than Rs. 25,000/-

Case 2 : In this case, the assessee is not eligible to claim the deduction since amount of salary is more than Rs. 25,000/- p.m.

Case 3 : In this case, the assessee is not eligible to claim the deduction since no. of days employed are less than 240 days.

Amendments and Changes over the years

Finance Bill, 1988

The Income-tax Act’s current provisions offer a number of tax breaks to promote the expansion of industry and enterprise. The dearth of job prospects in the nation is an issue. It is suggested to include a new section, 80JJAA, to offer incentives in the form of a special deduction against a company’s business profits, with the goal of encouraging businesses to further increase job possibilities. The deduction would be in addition to any wages or salaries paid, which the company would otherwise be eligible to deduct as business expenses. If the following requirements are met, the suggested deduction amount is 30% of the total wages or pay paid to the new employees.

When starting a new project, there should be at least 100 employees. If a business already exists and employs a minimum of one hundred people, then the total number of new hires must be at least 10% more than the current workforce. In these circumstances, a deduction of 30% of the new employees’ salaries would be permitted. The term “worker” will mean “workman” as defined by the Industrial Workers Disputes Act for the objective of claiming the benefit. The employee in question must be regular employees who has worked for a minimum of 300 days per year.

The tax return must be accompanied by details verified in the required format by the tax auditor. The proposed change will be applicable to the assessment years 1999-2000 and later years, with effect from April 1st, 1999.²

♦ Finance Bill, 2013

Section 80JJAA of Income-tax Act outlines current provisions that allow an Indian company engaged in industrial undertakings that involve the manufacture or production of articles or things to deduct an amount equal to 30% of the additional wages paid to new regular workers hired throughout the previous year. There is a 3-year window for which the deduction is eligible, covering the A.Y. for the year before to the year that the employment was given. If the industrial undertaking is created through the division, reconstruction, or merging of another industrial operation, then no deduction under this provision is permitted.

It is being claimed that employees in other industries are also eligible for the tax incentive under section 80JJAA, even though it was designed specifically for the hiring of blue-collar workers in the manufacturing sector. Accordingly, it is suggested to alter section 80JJAA to state that an Indian company that makes money from the production of items in its factory is eligible for the deduction. For three assessment years, inclusive of A.Y. relevant to the prior year in which such employment is provided, the deduction shall be made in an amount equal to thirty percent of the additional wages paid to the new regular workers hired by the assessee in such factory in the preceding year.

Additionally, it is proposed to state that if the factory is purchased by the assessee firm as a result of an amalgamation with another company, or if it is split off or transferred from another existing organization, the deduction under this provision will not be applicable. With effect from April 1, 2014, this revision will be applicable to the 2014-15 assessment year as well as any later assessment years.³

♦ Finance Bill, 2016

In order to replace section 80JJAA of the Income-tax Act regarding the deduction for hiring new employees, clause 44 of the bill proposes to add a new section. The current clause stipulates that after 3 years, new regular workers in a factory would have their 30% of their increased salaries deducted. The provisions cover businesses that make goods in factories. It is suggested that all assessee who are obligated by section 44AB to have an audit of their accounts receive the benefit. The eligibility requirements pertaining to the minimum number of employees and the total number of days they must work throughout the year are also intended to be liberalized.

Under the proposed regulations, employees whose total monthly emoluments are less than or equivalent to Rupees 25 thousand will be eligible for a deduction of costs. However, no deduction would be permitted for costs spent by employees for whom the government pays the full contribution under the Employees’ Pension Scheme, as announced in compliance with the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

This modification will become effective on 1^st April, 2017 and will therefore, be applicable to the A.Y 2017-2018 as well as any subsequent years

FAQs

Whether the deduction under section 80-JJAA is in addition to deduction u/s 37(1)

Yes, deduction u/s 80-JJAA is in excess of deduction u/s 37(1). Hence, total deduction of additional employee salary expense come to 130%

For how many years, we can claim deduction under this section.

Deduction under this section can be claimed for 3 consecutive years.

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