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May 28, 2020

How to Get 30% additional deduction on employee cost for business and startups in Income Tax section 80JJAA?

by Mahesh Mara in Compliance Law, Income Tax

How to Get 30% additional deduction on employee cost for business and startups in Income Tax section 80JJAA?

Deduction in respect of employment of new employees as per section 80JJAA

In order to promote employment generation in India the government has introduced section 80JJAA under chapter VIA of the Income tax act, 1961, which allows for deduction in respect of employment of new employees. It is applicable to any assessee having income from business and who care liable for audit under section 44AB of the Income tax act, 1961. The provision is beneficial to newly incorporated startups and businesses. The assessee will not get the deduction if the business is set up by restructuring the existing business or the business is acquired from other person. The assessee will get deduction whether he is opting for new tax regime or old tax regime u/s 115BAC from Previous year 2020-21.

Quantum of deduction under this section:

The assessee will get deduction of 30% of the additional employee cost for 3 consecutive years from the year in which the assessee starts incurring the additional employee cost. In order to claim the deduction, the assessee is required to file Form 10DA. Form 10DA is to be filed by a Practicing Chartered Accountant on behalf of the assessee on the Income tax e filing portal before or at the time of filing return of income.

What do you mean by additional employee cost?

Additional employee cost means total emolument/ salary/ wages paid or payable to additional employees during the previous year. In case of new business additional employee cost shall be emolument paid or payable to employees employed during that period.

Note:

1. In case of existing business, no deduction shall be allowed if there is no change in number of employees. For instance, Total employee as on 31/03/2019 were 100 and during previous year 2019-20, 15 employees left the job and 15 new employees Joined then there will be no deduction under this section. If in the given example 20 new employees joined then deduction will be allowed on emolument paid to 5 employees

2. In case the salary is paid in cash then the assessee is not liable for deduction under section 80JJAA

3. Additional employees do not include-

(a) Employee whose emoluments/ salary is more than Rs. 25,000 per month

(b) Employee employed for less than 240 days in the previous year (In case of manufacture of apparel or footwear or leather products employed for less than 150 days in the PY)

(c) Employee does not participate in Recognised Provident Fund

(d) Employee for whom the entire contribution is paid by government under Employees pension scheme notified in accordance with the provision of the employees’ provident fund & miscellaneous provision act, 1952.

(e) As per amendment made by finance act 2018, if an employee is employed during the previous year for less than 240 days or 150 days in case of manufacture of apparel or footwear or leather products, but is employed for more than 240 days or 150 days, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year. Accordingly, the employer would be entitled a deduction of 30% of additional employee cost of such employees in the succeeding year.

Let us understand by example

Mr. X has commenced the business of manufacture of tea on 01/04/2019. He has employed 162 employees during the previous year 2019-20 the details of the employees are as follows:

No of employeesDate of employmentType of employmentTotal monthly emoluments per employee
4201/04/2019Regular22,500
3701/06/2019Regular25,500
5501/08/2019Contractual25,500
2801/10/2019Regular22,500

The regular employees participate in recognized provident fund while the contractual employees do not. Also Mr. X is liable for Tax audit u/s 44AB.

Let us calculate the amount of deduction to Mr. X under section 80JJAA

Calculation of Total employee cost:

ParticularsNo of EmployeesNo of Employees
Total number of employees employed during the year 162
Less: Contractual employees employed on 01/08/2019, since they do not participate in recognized provident fund and their total monthly emoluments exceed Rs. 25,000(55) 
Less: Regular employed on 01/06/2019, since their total monthly emoluments exceed Rs. 25,000(37) 
Less: Regular employed on 01/10/2019, since they have been employed for less than 240 days in the PY 2019-20(28)(120)
Number of additional employees 42
(X) Total monthly salary per employee 22,500
(X) Total no of months 12
Additional Employee Cost1,13,40,000

Thus, deduction under section 80JJAA = 30% of Additional employee cost i.e. 1,13,40,000

Deduction u/s 80JJAA= 34,02,000