80JJAA of the Income Tax Act

Section 80JJAA of the Income Tax Act provides formal sector employers tax deductions on their business income. This deduction is also known as the 80JJAA deduction. 80JJAA of the Income Tax Act is a special provision formed to encourage employers to contribute towards the formal sector employment generation in our country by hiring additional workforce during the fiscal year in consideration. This provision aims to reduce the unemployment burden in the economy by incentivising employers to hire more. 

Here is a general understanding of the details of this provision. 

What does hiring “additional employees” mean in Sec 80JJAA of the Income Tax Act?

In the context of 80JJAA of the Income Tax Act, additional employees hired play a significant role. These are employees engaged in the previous year and do not include specific hiring. All hiring that does not fall under the below categories can qualify under 80JJAA Income Tax Act provisions. 

1. ₹25,000 per month salary: Hiring employees earning a total salary of more than ₹25,000 per month may qualify employers for tax deduction benefits under 80JJAA provisions. 
2. Employed for less than 240 days: The provisions of 80JJAA also exclude employees who were hired for less than 240 days in the previous year. The minimum number of days is reduced to 150 in the case of leather, apparel or footwear manufacturing. 
3. Casual labour and similar categories: Employing a workforce that is not a participant in the regular provident fund would be excluded under 80JJAA of the Income Tax Act. This category of workforce includes casual workers and similar categories employed during the year under consideration.
4. The government contributed pension receiving employees: If the entire contribution under the Employees Provident Fund (EPF) is made by the government, then such employing activity would be excluded under 80JJAA.

Section 80JJAA is applicable to whom?

80JJAA of the Income Tax Act allows for certain provisions pertaining to tax deductions of 30 per cent on gains and profits from businesses. This deduction of 30 per cent is on the cost of hiring additional employees for three years in a consecutive chronology. 

The following are the conditions specific to availing this benefit under 80JJAA of the Income Tax Act:

1. Filing and submission of ITR: To avail of the benefits under 80JJAA Income Tax Act provisions, the employer needs to file and submit their Income Tax Returns (ITR) before the due date. The ITR can be submitted along with a Chartered Accountant (CA) report in Form 10DA. 
2. Not acquired or reorganised: The business under consideration should solely belong to the assessee and should not be a result of acquisition. The assessee’s business should also not be a result of business reorganisation. 
3. Not reconstructed or split up: To qualify for 80JJAA deductions, the assessee’s business must not be a result of split-up. A business reconstructed from any other business would also not qualify for the benefits. However, the assessee’s business can qualify if it is reconstructed by revising and re-establishment.

How do we calculate the additional employee cost under Section 80JJAA?

A hypothetical example can help in better understanding the additional employee cost for 80JJAA deductions.

Say, a company called Urjaa has started operating in the Financial Year (FY) 2022-23. The business employed 50 professionals and had an employee cost of ₹1 crore. 

Furthermore, in FY 2023-24, the company employed 70 employees, and its total employee cost increased to ₹1.3 crore. 

Therefore, the cost of hiring additional employees for Urjaa would be = ₹1.3 crore – ₹1 crore = ₹30 lacs. 

Urjaa incurred an additional cost of ₹30 lacs in FY 2023-24 for additional employees. 

So, the additional employee cost for the calculation of the 80JJAA deduction would be calculated on this cost of ₹30 lacs. 

80JJAA deduction = 30% of ₹30 lacs = ₹9 lacs 

Therefore, subject to the business and employees’ eligibility conditions, Urjaa can claim a deduction of ₹9 lacs in FY 2023-24 for tax deduction under Section 80JJAA of the Income Tax Act. 

Please note that the remuneration or salary paid to these employees should be in electronic format to qualify for this deduction. Also, this tax deduction benefit can only be claimed by goods selling businesses. 

Conclusion 

An employer in the goods manufacturing and production segment can benefit by reducing India’s unemployment burden through 80JJAA. This benefit is in the form of a 30 per cent tax deduction on new employee costs. Employers need to file Form 10DA before the due date and avail of this tax deduction benefit under 80JJAA of the Income Tax Act.