New Section 80JJAA Deduction for Salaries paid to New Employees

New Section 80JJAA Deduction for Salaries paid to New Employees

The Government of India, to promote employment generation activities, had introduced Section 80JJAA under Chp. VIA of Income Tax Act, 1961, allows for deduction in respect of employment of new employees. Section 80JJAA enables an employer to enjoy tax sops, or you can say – “cashback” for payment of salaries to new employees employed by him. These sops were first introduced in the year 2016 but were limited only to some specific assessments. Later on, the section was amended through various Finance acts to ultimately allow almost every Business to enjoy benefits or instead deduction.

Now, the problem is, many of you, including many professionals, are unaware of this deduction. Many may know about it but are ignorant of the same as this is a newly added section and a little complicated when compared with standard assumptions such as 80C/80D/80G etc.

To give you a glimpse of what you can save in terms of your Tax Liability, let’s say you hired one accountant in April 2019 with a net salary of Rs 2,00,000 per year. Then, as per calculations under this section, you are eligible for a deduction of Rs 60,000 each for three years starting from FY 2019-20 from your total income. This means, if you are a company taxed at 25%, you will end up saving Rs 15,000 in your final tax liability for three years.

Hence, by paying a salary of Rs 2,00,000, you save Tax of Rs 45,000 (approx.)

A RUN-DOWN TABLE OF DEDUCTIONS UNDER SECTION 80JJAA

APPLICABILITYAny assessee having income from Business and liable for tax audit u/s 44AB
DEDUCTIONQUANTUM30% of additional employee cost incurred during the previous year in the course of Business
PERIOD OF DEDUCTIONThe deduction is available for three assessment years starting from the year in which employment is provided.
ADDITIONAL
EMPLOYEE
COST
(AEC)
MEANING“Additional Employee Cost” (AEC) = Total Emoluments paid or payable to Additional.
Employees employed during the previous year
OTHER
POINTS
In case of Existing Business:

AEC = 0 (NIL), IF-

1. There is no increase in the number of Employees from the total number of employees employed as on last day of the preceding year, OR

2. Emoluments are paid otherwise than by

– Account payee cheque OR

– Account payee bank draft OR

– ECS through a bank account.

In case of First Year of Business:

AEC = All Emoluments Paid/payable to employees employed during that first year.

ADDITIONAL
EMPLOYEE
INCLUDEAn employee who has been employed during the previous year & whose employment has the effect of increasing the total number of employees employed as on the last day of the preceding year
EXCLUDE(a) an employee whose total emoluments are more than INR 25000 per month; or
(b) an employee for whom the Government pays the entire contribution under the Employees’ Pension Scheme notified following the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952); or
(c) an employee employed for a period of fewer than 240 days during the previous year [150 days in the case of an assessee who is engaged in the Business of manufacturing of apparel or footwear or leather products]; or
(d) an employee who does not participate in the recognised provident fund
OTHER
POINTS
Where an employee is employed during the previous year for a period of fewer than 240 days or 150 days, as the case may be, but is utilised for a period of 240 days or 150 days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year. The provisions of this section shall apply accordingly.
EMOLUMENTSINCLUDEAny sum paid or payable to an employee instead of his employment, e.g. salary, bonus etc.
EXCLUDE(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; and
(b) any lump-sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension etc.
NO DEDUCTION(a) if the Business is formed by splitting up, or the reconstruction, of an existing business; or

(b) if the Assessee acquires the Business by way of transfer from any other person or as a result of any business re-organisation; or

(c) unless the Assessee furnishes along with the return of income the chartered accountant's report, as defined in the Explanation to section 288, i.e. Form 10DA electronically.




*where an employee is employed < 240 days in the Current year but is used> 240 days in the immediately succeeding year, he shall be deemed to have been engaged in the succeeding year, and the provisions of this section shall apply accordingly.

No Deduction:-

a) if the Business is formed by splitting up, or the reconstruction, of an existing business; OR

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

c) unless the Assessee furnishes along with the ITR a report by a CA in Form 10DA electronically.

FAQ

Q.1 I’m a Doctor who has started a clinic this year and hired two compounders. Am I eligible for deduction u/s 80JJAA?

Ans:- No. since this section applies only to taxpayers having income from Business and not gain from any Profession.

Q.2 I am a trader showing business profits at 8% under presumptive taxation scheme u/s 44AD. Am I eligible for any deduction u/s 80JJAA?

Ans:- No. Since this section is applicable only for Assessee liable for Tax audit u/s 44AB.


Q.3 A Businessman (Tax Audit Eligible) appointed ten employees on the first day of the year 2019-20 having a salary of Rs 10000 pm. How much total deduction is allowed to Mr A?


Ans:- Deduction u/s 80JJAA

= 30% of Additional Employee Cost (AEC)

= 30%*(Salary Pm*No of month

employed*No of Additional Employees)

=30%*(10000*12m*10)

= Rs. 360000

This deduction is allowed for three years, i.e. Rs 360000 in FY 2019-20, 2020-21 & 2021-22.

Q.4 A Businessman (Tax Audit Eligible), Appointed ten new employees with per month salary as follows:-

a. Basic = 10000

b. HRA = 4000

c. Conveyance = 1000

d. Employer Contribution to PF = Rs 1250

However, He paid a salary of 11 months only, i.e. up to February, till 31st March of the year. March salary was later credited in the month of April next year.

Calculate the Deduction u/s 80JJAA.

Ans:- Deduction u/s 80JJAA

= 30% of Additional Employee cost

= 30%*Total Emoluments

(Paid+Payable)*Additional Employees

= 30%*((Basic+HRA+Conveyance)*no of months employed)*New employees

= 30%*((10000+4000+1000)*12)*10

= Rs 540000.

Employer’s contribution to PF/PPF is not to be taken into account while calculating AEC u/s 80JJAA.


Q.5 M/s XYZ, Manufacturer having Turnover of 10 Crores in PY 19-20. As on 31st March 2019, there were 50 employees in a total of which 5 Employees retired on 5th May 2019. On 1st June 2019, the firm recruits 15 employees. M/s XYZ pays equal emoluments to the newly appointed employees as follows:

– Salary =15000 Per Month

– Bonus & Incentives = 2000 Per Month

– Other Perquisites = 5000 Per Month Calculate Additional Employee Cost & Deduction as per section 80JJAA for Ay 2020-21.

Ans:- Total Employees as on the last day of the Previous year i.e. as on 31/03/2019 = 50.

Additional Employee = Employee employed during the current year due to which net total number of employees has been increased from last year.

= Total Employees on last day of the previous year (on 31/03/2019) + New Employees appointed on 1st June – Employees left/retired on 5th May

= 50 + 15 – 5

10 Employees

Additional Employee Cost (AEC)

= Total Emoluments * Additional Employees

= (15000+2000+5000)*10 Employees*10 Months

= 22,00,000

Deduction u/s 80JJAA

= 30% of Additional Employee Cost

= 30% of 2200000

= 660000/-

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