Deduction u/s 80JJAA is a Game changer since Budget 2016 as the amended law is with a view to encourage employment generation. Author CA Sunil Maloo (Managing Partner, Sunil Maloo & Co) highlights that the benefit u/s. 80JJAA is an additional deduction of 30% of additional employee cost incurred in the previous year, for three AYs and a total Benefit of 90% including the relevant AY to the previous year in which such employment is provided. The author brings out certain differences pre and post benefit available in 2016 such as the fact that before 2016, benefit was available only if there is an increase of at least 10% in total number of workmen, which now stands removed. The author then discusses the applicability criteria and thereafter discusses definitions of key words such as Additional Employee Cost, Additional Employee Emoluments etc. The author signs off by stating that since Section 80JJAA has many technical conditions to be complied with, an attempt is made to decode the same in simple manner. 

“Tax Benefits on Employment Generation”

1. Attention Businessmen - You can get tax incentives for paying salary to your new employees!!  For example, if you pay Rs 100 to new employees – You will get benefit of Rs 190 for Tax Purpose – Additional 90% benefit.

2. 80JJAA – Gamechanger since Budget 2016

Before 2016 benefit was available to –

• Only manufacturers;

• Only if new 'workmen' are employed 300 days out of 365 days of year

• Only if there is an increase of at least 10% in total number of workmen 

• Before 2016 the conditions were very unpractical

Law Amended from 2016 with a view to encourage employment generation

• Now incentive to all sectors instead of previously only manufacturing sector

• Now All employees are covered – earlier only workman were covered

• Minimum number of days for new employee has been relaxed from 300 days to 240 days

• Condition of 10% increase in number of employees has been removed

• In the first year of a new business, the benefit of this section is available on entire salary cost

3. 80JJAA – what is the BENEFIT??

• Additional deduction of 30% of additional employee cost incurred in the previous year, for three assessment years 

• Total Benefit – 90% including the assessment year relevant to the previous year in which such employment is provided

4. 80JJAA – Applicability Criteria

• The Assessee must be subject to tax audit u/s 44AB;

• Benefit available only in case of Business; (Professionals not covered)

• Business must not be formed by splitting up, or the reconstruction, of an existing business;

• Business must not be acquired by way of transfer from any other person or as a result of any business reorganization

• The Assessee must furnish CA’s report in form 10DA before the Tax Audit due date

5. 80JJAA – Additional Employee Cost meaning

a) For existing business – Additional Employee Cost means

• Total emoluments paid or payable to additional employees employed during the previous year

• However, it would be NIL, if

º 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

º Emoluments are paid otherwise than by banking channel or Electronic Mode

b) For first year of business – Additional Employee Cost means

• Emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost

• Technically for the first year of Business, this benefit would be available on entire employee cost without any conditions.

6. 80JJAA – Additional Employee meaning

• Means 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

º Employees having monthly emoluments exceeding Rs 25,000;

º Employees for whom entire contribution is paid by Government under Employee Pension Scheme

º Employee employed for a period less than 240 days (150 Days for business of manufacturing of apparel or footwear or leather products)

º Employees who are not registered under the PF

7. 80JJAA – What if Employee employed for less than 240 days??

• No worry at all;

• If in the first year of employment,  the new employee is  employed for less than 240 Days  BUT  he is employed for 240 days or more  in the immediately succeeding year –  then he shall be deemed to be employed in the succeeding year

8. 80JJAA – Emoluments meaning

• Means any sum paid or payable to an employee in lieu of his employment by whatever name called, but does not include

º Employer contribution to a pension fund or other similar fund; or

º Any payment paid or payable at the time of retirement of employee

• Above definition is useful for –

º Working out the 30% amount of deduction; and

º Working out the condition of monthly salary of Rs 25,000

9. Checkpoints for not missing the benefits

•  first year of business – entire employee cost is covered – without any conditions

•  for existing business – whether you have effective NET increase in your employees from first day to last day of FY

•  whether all employees are registered under the PF

•  whether full Contribution to Employee Pension Scheme is done by Govt

•  whether payment is not made in case

•  whether employee is covered under the monthly salary range of Rs 25,000

•  whether new employee has worked for 240 days and if not then also check for next year

•  filing of form 10DA by a CA

10. Once eligible for one year, then deduction would continue for 3 years

•  All the conditions of this section are required to be complied with in the first year of the claim. Once the eligibility and quantum is determined in the year 1, then same would automatically continue in year 2 and year 3, even if the new employees for which the deduction is claimed in year 1, leaves the organization in year 2 or year 3.

11. 80JJAA – Icing on the cake

•  Government has recently given options to the Assessee for concessional tax rates but at the cost of forgoing all exemptions / deductions / benefits – But this benefit would be available under the new options as well.

•  Deduction u/s 80JJAA is available even if

º Company opts for concessional tax under section 115BAA/115BAB i.e. option to adopt concessional rate of 15% and 22%

º Individual and HUFs adopt for new higher slab system u/s 115BAC (5%,10%,15% etc.) by forgoing all deduction but still this benefit would be available

º Co-Op Society opts for concessional Tax Rate u/s 115BAD

12. Conclusion – Employment generation would always be the primary objective of all the economies and for the very same reason, the Government has granted the additional benefits under Income Tax Act, 1961. However, Section 80JJAA has many technical conditions to be complied with. Therefore, an attempt is made to decode the same in simple manner.