Deduction in respect of additional employee cost
146(1)
Subject to the conditions specified in sub-sections (2) and (3), if the gross total income of an assessee, to whom section 63 applies, includes any profits and gains from business, a deduction of an amount equal to 30% of additional employee cost incurred in the course of such business in the tax year shall be allowed.
146(2)
The deduction referred to in sub-section (1) shall be allowed for three consecutive tax years, beginning from the tax year in which the employment is provided.
146(3)
The deduction under sub-section (1) shall not be allowed, if––
- (a) the business is formed by splitting up, or the reconstruction, of an existing business; or
- (b) the business is acquired by the assessee through transfer from any other person or as a result of any business reorganisation;
- (c) the assessee does not furnish the report of an accountant, before the specified date as referred to in section 63, giving the particulars in the report, as prescribed.
146(4)
The condition referred to in sub-section (3)(a) shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 140(4) in the circumstances and within the period specified in that sub-section.
146(5)
In this section,—
(a) “additional employee cost” means—
- (i) the total emoluments paid or payable to additional employees employed during the tax year; or
- (ii) emoluments paid or payable to employees employed during the tax year, where that year is the first year of a new business, and it shall be nil in the case of an existing business, if—
- (A) there is no increase in the number of employees from the total number employed as on the last day of the preceding tax year; or
- (B) emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account or through such other electronic mode, as prescribed;
(b) “additional employee” means an employee who has been employed during the tax year and whose employment increases the total number of employees employed by the employer as on the last day of the preceding tax year, but does not include any employee—
- (i) whose total emoluments exceed twenty-five thousand rupees per month;
- (ii) for whom the Government pays the entire contribution under the Employees’ Pension Scheme notified as per the provisions of the Employees, Provident Funds and Miscellaneous Provisions Act,1952;
- (iii) employed for less than one hundred and fifty days in case of an assessee who is engaged in the business of manufacturing of apparel or footwear or leather products, except where such employee is employed for said number of days in the immediately succeeding tax year, he shall be deemed as an additional employee of the succeeding tax year and the provisions of this section shall apply accordingly;
- (iv) employed for less than two hundred and forty days during the tax year in case of any other assessee, except where such employee is employed for said number of days in the immediately succeeding tax year, he shall be deemed as an additional employee of the succeeding tax year and the provisions of this section shall apply accordingly; and
- (v) who does not participate in a recognised provident fund;
(c) “emoluments” means any sum paid or payable to an employee in lieu of his employment, by whatever name called, but does not include––
- (i) employer contributions to any pension or provident fund or any other fund for the benefit of the employee as mandated by any law; and
- (ii) lump sum payments paid or payable to an employee at the time of termination of his service, superannuation, or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like.
Section Summary:
Section 146 provides a tax deduction for businesses that incur additional employee costs. The deduction is equal to 30% of the additional employee cost incurred during the tax year. This deduction is available for three consecutive tax years, starting from the year in which the additional employees are hired. However, certain conditions and exclusions apply, such as restrictions on businesses formed through splitting, reconstruction, or acquisition, and specific criteria for what qualifies as "additional employee cost" and "additional employee."
Key Changes:
- New Deduction: Introduces a 30% deduction on additional employee costs, which was not explicitly available under the prior income tax law.
- Duration: The deduction is available for three consecutive tax years, starting from the year of employment.
- Exclusions: Specific exclusions are introduced, such as businesses formed through splitting, reconstruction, or acquisition, and employees earning more than ₹25,000 per month or those covered under government pension schemes.
- Additional Employee Definition: Clarifies the definition of "additional employee" and "additional employee cost," including conditions like minimum employment days and payment methods.
Practical Implications:
- For Businesses: Businesses that hire additional employees can claim a 30% deduction on the costs associated with these employees, provided they meet the conditions. This incentivizes job creation, especially in labor-intensive sectors like manufacturing.
- Compliance Burden: Businesses must ensure they maintain proper documentation, such as employee records and payment proofs, to claim the deduction. They must also furnish a report from an accountant.
- Exclusions: Businesses formed through splitting, reconstruction, or acquisition cannot claim this deduction unless they fall under specific revival or re-establishment conditions.
- Sector-Specific Rules: For businesses in apparel, footwear, or leather manufacturing, employees must work for at least 150 days to qualify as additional employees. For other businesses, the threshold is 240 days.
Critical Concepts:
- Additional Employee Cost: Refers to the total emoluments paid or payable to additional employees during the tax year. For new businesses, it includes all employee costs in the first year. For existing businesses, it applies only if there is an increase in the number of employees compared to the previous year.
- Additional Employee: Defined as an employee hired during the tax year who increases the total number of employees. Excludes employees earning more than ₹25,000 per month, those covered under government pension schemes, and those not participating in a recognized provident fund.
- Emoluments: Includes salaries, wages, and other payments made to employees but excludes employer contributions to pension or provident funds and lump-sum termination payments.
Compliance Steps:
- Maintain Records: Keep detailed records of employee hires, emoluments paid, and payment methods (e.g., account payee cheques or electronic transfers).
- Accountant's Report: Obtain a report from an accountant certifying the additional employee cost and compliance with the section's conditions.
- Verify Eligibility: Ensure the business does not fall under the exclusions (e.g., formed through splitting, reconstruction, or acquisition).
- File Claims: Include the deduction in the tax return for the relevant years, supported by the necessary documentation.
Examples:
- Scenario 1: A new footwear manufacturing business hires 50 employees in its first year. The total emoluments paid to these employees are ₹50 lakh. The business can claim a deduction of 30% of ₹50 lakh, i.e., ₹15 lakh, for three consecutive years.
- Scenario 2: An existing apparel business increases its workforce from 100 to 120 employees during the tax year. The total emoluments paid to the 20 additional employees are ₹20 lakh. The business can claim a deduction of 30% of ₹20 lakh, i.e., ₹6 lakh, for three consecutive years.
- Scenario 3: A business acquires another company and hires 30 new employees. Since the business was acquired through transfer, it cannot claim the deduction under this section.