Section 146: deduction for additional employee cost

The deduction

Subject to the conditions in sub-sections (2) and (3), where the gross total income of an assessee to whom section 63 applies includes profits and gains derived from business, a deduction equal to 30% of additional employee cost incurred in the course of that business in the tax year is allowed.

The deduction is allowed for three consecutive tax years, beginning from the tax year in which the employment is provided.

When the deduction is not allowed

The deduction is not allowed if:

• The business is formed by splitting up, or the reconstruction, of an existing business.
• The business is acquired by the assessee through transfer from any other person or as a result of any business reorganisation.
• The assessee does not furnish, before the specified date referred to in section 63, a report of an accountant giving the prescribed particulars.

Exception for re-established businesses

The "splitting up or reconstruction" disqualification does not apply to an undertaking that is re-established, reconstructed or revived by the assessee in the circumstances and within the period specified for the corresponding Section 140(4) exception.

What counts as "additional employee" and "additional employee cost"

"Additional employee cost" means the total emoluments paid or payable to additional employees employed during the tax year, or - if the tax year is the first year of a new business - emoluments paid or payable to employees employed during that year. It is nil for an existing business if there is no increase in the total number of employees from the last day of the preceding tax year, or if emoluments are paid otherwise than by account payee cheque, account payee bank draft, electronic clearing system, or other prescribed electronic mode.

"Additional employee" means an employee employed during the tax year whose employment increases the total headcount from the last day of the preceding tax year - but excludes:

• An employee whose total emoluments exceed ₹25,000 per month
• An employee for whom the Government pays the entire contribution under the Employees' Pension Scheme (notified under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952)
• An employee employed for less than 150 days in a tax year, for an assessee engaged in manufacturing apparel, footwear or leather products (unless employed for that many days in the immediately succeeding tax year, in which case they are deemed an additional employee of that succeeding year)
• An employee employed for less than 240 days during the tax year, for any other assessee (with the same succeeding-year deeming rule)
• An employee who does not participate in a recognised provident fund

What counts as "emoluments"

"Emoluments" means any sum paid or payable to an employee in lieu of employment, by whatever name called, but excludes employer contributions paid or payable to any pension, provident or other fund mandated by law for the employee's benefit, and lump sum payments paid or payable on termination of service, superannuation or voluntary retirement - such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits or commutation of pension.

Frequently asked questions