Deduction in respect of employment of new employees [New Section 80JJAA]

Effective from: A.Y. 2017-18

(i) Existing incentive under section 80JJAA:

Under section 80JJAA, a deduction of 30% of additional wages paid to new regular workmen in a factory is allowed. The section applies to an assessee, whose gross total income includes any profits and gains derived from the manufacture of goods in a factory. The deduction is allowable for three assessment years, including the assessment year relevant to the previous year in which such employment is provided. The ‘workmen’ should be employed for not less than 300 days in a previous year. Further, in case of an existing factory, benefits are allowed only if there is an increase of atleast 10% in the total number of workmen employed on the last day of the preceding year.

(ii) Objective of substitution of new section:

In order to extend this employment generation incentive to all sectors, section 80JJAA has been substituted.

(iii) Quantum of deduction:

Accordingly, where the gross total income of an assessee to whom section 44AB applies, includes any profits and gains derived from business, a deduction of an amount equal to 30% of additional employee cost incurred in the course of such business in the previous year, would be allowed for three assessment years including the assessment year relevant to the previous year in which such employment is provided.

(iv) Conditions to be fulfilled:

The deduction would be allowed only subject to fulfilment of the following conditions:

 

(v) Meaning of certain terms:

Term

Meaning

 

(a)	Additional employee cost	Total emoluments paid or payable to additional employees employed during the previous year.
		In the case of an existing business In the first year of a new business	The additional employee cost shall be Nil, if—   (a) there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year; (b) emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through abank account The emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost.
(b)	Additional employee	An employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year.   Exclusions from the definition: (a) an employee whose total emoluments are more than ` 25,000 per month; or (b) an employee for whom the entire contribution is paid by the Government under the Employees’ Pension Scheme notified in accordance with the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952; or (c) an employee employed for a period of less than 240 days during the previous year; or (d) an employee who does not participate in the recognised provident fund.
(c)	Emoluments	any sum paid or payable to an employee in lieu of his employment by whatever name called.   Exclusions from the definition:
		(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 for the time being in force; 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 and the like.

 

(vi)  The provisions of this section, as they stood immediately prior to their amendment by the Finance Act, 2016, shall apply to an assessee eligible to claim any deduction for A.Y.2016-17 or earlier assessment year.

Example

Mr. A has commenced the business of of manufacture of computers on 1.4.2016. He employed 350 new employees during the P.Y.2016-17, the details of whom are as follows –

	No. of employees	Date of employment	Regular/ Casual	Total monthly emoluments per employee (`)
(i)	75	1.4.2016	Regular	24,000
(ii)	125	1.5.2016	Regular	26,000
(iii)	50	1.8.2016	Casual	17,000
(iv)	100	1.9.2016	Regular	24,000

 

The regular employees participate in recognized provident fund while the casual employees do not. Further, out of 75, 50 and 100 regular employees employed on 1.4.2016, 1.5.2016 and 1.9.2016, only 40, 30 and 60 qualify as a “workman” under the Industrial Disputes Act, 1947.

Compute the deduction, if any, available to Mr. A for A.Y.2017-18, if the profits and gains derived from manufacture of computers that year is ` 75 lakhs and his total turnover is 2.16 crores.

Solution
Mr. A is eligible for deduction under section 80JJAA since he is subject to tax audit under section 44AB for A.Y.2017-18, as his total turnover from business exceeds ` 1 crore and he has employed “additional employees” during the P.Y.2016-17.

Additional employee cost = ` 24,000 × 12 × 75 [See Working Note below] = ` 2,16,00,000

Deduction under section 80JJAA = 30% of ` 2,16,00,000 = ` 64,80,000.

Working Note:

Number of additional employees

Particulars	No. of workmen
Total number of employees employed during the year		350
Less: Casual employees employed on 1.8.2016 who do not participate in recognized provident fund   Regular employees employed on 1.5.2016, since their total monthly emoluments exceed Rs.25,000   Regular employees employed on 1.9.2016 since they have been employed for less than 240 days in the P.Y.2016-17.	50 125 100 ………………	_275 ………………
Number of “additional employees”		75

 

Note – Since casual employees do not participate in recognized provident fund, they do not qualify as additional employees. Further, 125 regular employees employed on 1.5.2016 also do not qualify as additional employees since their monthly emoluments exceed Rs.25,000. Also, 100 regular employees employed on 1.9.2016 do not qualify as additional employees for the P.Y.2016-17, since they are employed for less than 240 days in that year.

Therefore, only 75 employees employed on 1.4.2016 qualify as additional employees, and the total emoluments paid or payable to them during the P.Y.2016-17 is deemed to be the additional employee cost. From A.Y.2017-18, it is not necessary that the employee should qualify as a “workman” under the Industrial Disputes Act, 1947 for the employer to avail benefit under section 80JJAA.