Section 80JJAA of the Income Tax Act

Businesses in India can reduce their tax liability by claiming certain expenses and costs as a deduction from their taxable income by using the various provisions of the Income Tax Act of 1961. One of the most prominent sections is section 80JJAA, which offers tax deductions to businesses that create new jobs. 

If you are a business owner, being aware of the deduction under section 80JJAA and its various implications can help you reduce your tax liability significantly. Here is everything you need to know about this particular section of the Income Tax Act.      

What Is Section 80JJAA of the Income Tax Act? 

Introduced in 1999, Section 80JJAA of the Income Tax Act enables certain eligible businesses to claim a deduction of 30% of their additional employee costs incurred during a financial year as a deduction from their total income. This lowers the total taxable income of businesses and helps them reduce their tax liability. Eligible businesses can claim the deduction under section 80JJAA of the Income Tax Act for three consecutive years, including the year in which the additional employment was provided. 

The primary objective behind the introduction of section 80JJAA was to incentivise employers to create new employment opportunities in the formal sector. This provision can be highly useful for labour-intensive businesses and companies that are expanding their workforce.    

Definition of Additional Employee and Additional Employee Costs As Per Section 80JJAA of the Income Tax Act

Understanding the definitions of “additional employee” and “additional employee costs” is crucial for claiming deductions under Section 80JJAA. Here is how the Income Tax Act of 1961 defines these two terms: 

• Additional Employee  

An additional employee is an individual newly employed by a business during the financial year. The inclusion of this additional employee in the workforce must lead to an increase in the total number of employees in the business compared to the total number of employees in the previous financial year. 

However, the following individuals do not come under the definition of an additional employee: 

• An individual with total emoluments exceeding ₹25,000 per month.
• An individual who was employed for fewer than 240 days during the financial year. In the case of businesses manufacturing leather, footwear, or apparel, an individual who was employed for fewer than 150 days during the financial year. 
• An individual who does not participate in any recognised provident fund schemes.  
• An individual for whom the entire contribution is paid by the government through the Employees’ Pension Scheme (EPS).  

• Additional Employee Cost 

As per section 80JJAA, the term additional employee cost includes all of the emoluments payable or paid to additional employees employed during a financial year. 

The term emoluments means all kinds of sums payable or paid to an employee in exchange for his services. However, it does not include the following two components: 

• The employer’s contribution to a pension fund, provident fund, or any other statutory fund. 
• The lump-sum payment made to the additional employee at the time of termination, superannuation, or voluntary retirement. It includes gratuity, leave encashment, severance pay, commuted part of the pension, and other voluntary retrenchment benefits.      

Section 80JJAA also states that the additional employee cost shall be considered nil for existing businesses in the following two cases: 

• If there has been no increase in the total number of employees in the business between the financial year in question and its previous financial year. 
• If the emoluments to additional employees are paid in any mode other than an account payee cheque, account payee demand draft, or electronic clearing system (ECS). 

Conditions to Be Fulfilled to Claim Deduction Under Section 80JJAA of the Income Tax Act 

A business must fulfil the following list of conditions to claim the deduction under Section 80JJAA.  

• The business must have been operational for a minimum of 240 days in the financial year. 
• The business must have a minimum of 10 employees during the financial year. 
• The business must not have claimed the section 80JJAA deduction in the previous financial year.  
• The business must file Form 10DA (certified by a Chartered Accountant) at least one month before it files its income tax return. 
• The business must not have been acquired from any other person or entity and must not be the result of a business reorganisation activity.
• The business must not have been formed by splitting up or reconstructing other existing businesses. However, a revived, re-established, and reconstructed business can claim the deduction under section 80JJAA of the Income Tax Act.   

Penalties for Wrongful Claims Under Section 80JJAA of the Income Tax Act 

Claiming a deduction under section 80JJAA erroneously or fraudulently carries significant legal repercussions. Here is a quick overview of the penalties that may be levied for such activities. 

• A penalty ranging from 100% to 300% of the tax evaded due to fraudulent deduction claims will be levied. This penalty is in addition to the tax that was originally supposed to be paid by the business. 
• If false deduction claims under section 80JJAA are detected, the Income Tax Department (ITD) can examine and reassess the income of the business for as many as six previous financial years.    

Conclusion 

Section 80JJAA of the Income Tax Act is one of the many ways through which the Government of India aims to boost employment generation in the formal sector. By offering substantial tax benefits to businesses that create new jobs, this provision simultaneously addresses multiple economic issues, ranging from job creation to economic growth.   

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