Section 80JJAA Of Income Tax Act: Deductions, Applicability, Calculations, and Example

The Income Tax Act of India offers several tax deductions to help reduce taxable income of individuals and businesses. One such deduction is under Section 80JJA of Income Tax Act, which is commonly known as 80JJAA deduction. Continue reading this article to know the 80JJAA deduction in detail, including its applicability and calculation. 

What is Section 80JJAA of the Income Tax Act?

Section 80JJAA is a provision under the Indian Income Tax Act of 1961, which offers tax deductions to employers who generate employment in the formal sector. This deduction is provided against Income From Business for an assessee who has hired additional employees during a fiscal year. It allows employers to claim a deduction of up to 190% of additional employee costs incurred while employing new eligible employees.

The purpose of Section 80JJAA is to encourage employers to generate new employment opportunities in the formal sector and provide employment benefits to eligible employees. By providing a tax deduction, the government aims to incentivise employers to hire more people and thereby reduce the rate of unemployment in the country.

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

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 80JJAA?

Additional Employee Cost means total emoluments paid or payable to additional employees.

However, in the case of an existing business, additional employee costs shall be NIL if the total number of employees does not increase, which means the total number of employees joined should be more than the total number of employees left during the previous year.

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

Emoluments mean any sum paid or payable to an employee in lieu of his employment by whatever name called but does not include the contribution by the employer to a pension fund, provident fund or any payment paid or payable to an employee at the time of termination of his service or Voluntary retirement example: Gratuity, severance pay, voluntary retrenchment benefits, leave encashment, commutation of pension, et

Applicability of Section 80JJAA of the Income Tax Act

Section 80JJA of the Income Tax Act deals with tax deductions on profits and gains from businesses. The section allows a deduction of 30% on additional employee costs for three consecutive assessment years.

Take a look at the following conditions that you need to fulfil while applying for tax deduction under Section 80JJAA:

• You need to file an ITR within the due date and submit a CA report in Form 10DA.
• Your business should be solely yours and not acquired from any other person; it should not be the result of a business reorganisation.
• You should not form a business by splitting up or reconstructing any other existing business. However, if you have re-established, revived or reconstructed the business, you can claim this deduction.
• Emoluments paid to employees should be by an account payee cheque or electronic payment through a bank account
• The assessee must have Income from the Business and file the return before the tax audit due date (September 30th unless extended) along with the Form 10DA certified by a Chartered Accountant.

Note: Deductions under Section 80JJAA would be available to the assessee irrespective of the regime under which such assessee pays tax.

Form 10DA

Form 10DA is a mandatory form to be filed while claiming a deduction under section 80-JJAA. Given below are some important points related to Form 10DA:

Deductions under Section 80JJAA

The deduction available under Section 80JJA is 30% of additional employee costs incurred by a business. You can calculate the additional employee cost as the difference between total employee cost in the current fiscal year and previous fiscal year.

The determination of additional employee costs should be based on the following parameters:

• The employee should earn a total salary of not more than Rs. 25,000 per month.
• He/she should be employed for more than 240 days in the previous year.
• The employee should have participated in a recognised Provident Fund like casual workers, etc.
• The Government shouldn’t have paid the entire contribution of the EPF scheme for the employee. 

You can avail deduction under Section 80JJAA if your business fulfils the following conditions:

• Your business should be operational for at least 240 days in the previous year.
• It should have employed at least 10 employees in the previous year.
• The business shouldn’t have claimed any deduction under Section 80JJAA in the previous year.

Calculations under Section 80JJAA

Take a look at this 80JJAA example to understand the calculation procedure: 

Let’s say that ABC Ltd is a manufacturing business that started its operations in the financial year 2022-23. In FY 2022-23, the total employee cost of the business was Rs. 50 lakh and the business employed 200 employees. In FY 2023-24 he hired additional 100 employees and paid them Rs. 25 lakhs.

Additional employee cost incurred by ABC Ltd in financial year 2023-24 can be calculated this way: 

Additional employee cost in the FY 2023-24 = Rs. 25 lakhs

Deductions available to ABC Ltd under Section 80JJAA for the financial year 2023-24 would be calculated as follows:

Deduction under Section 80JJA = 30% of the additional employee cost

= 30% of Rs. 25 lakh

= Rs. 7.5 lakh

Therefore, ABC Ltd can claim a deduction of Rs. 7.5 lakh under Section 80JJA for the financial year 2023-24.

80JJAA deduction for AY 2024-25

Section 80JJAA of the Income Tax Act allows eligible enterprises to claim deductions against additional staff costs during Assessment Year (AY) 2024–25. It allows a deduction of 30% on employee recruitment costs incurred for three consecutive assessment years. It starts from the year in which additional employment is created and continues till the third year. 

Businesses can earn a total tax benefit of 90% if they include the assessment year relevant to the previous year in which such employment was provided. 

A business must fulfil the following conditions to avail deduction under Section 80JJAA for AY 2024-25:

• The business organisation should manufacture goods or produce specified articles.
• It must have hired additional employees in the previous financial year.
• The additional employee should not earn more than Rs 25000 per month.
• An appointed employee should have worked for a minimum of 240 days in the previous year.
• The business should be registered under the Employees' Provident Funds and Miscellaneous Provisions Act, of 1952.
• The business should not be formed by transfer of ownership or reconstruction of an existing business. 

Who Is Not Eligible to Claim Deduction

The following enterprises are not allowed to claim deduction under this section 

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

This clause shall not apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee;

(b) if the business is acquired by the assessee as a result of any business reorganisation;

(c) must furnish the report of the accountant before the specified date.

Final Word

It is important to note that deduction under Section 80JJAA is not available for businesses engaged in the service sector. If you are running a production-based business that meets the mentioned criteria, you can apply for the 80JJAA deductions. Go through the parameters carefully to avoid any mistakes related to the deduction claims.