Section 146 of the Income-tax Act, 2025 — Deduction for Additional Employee Cost (Old Section 80JJAA)

In plain language

What Section 146 is all about

Section 146 of the Income-tax Act, 2025 is the government's tax reward for creating new jobs. It carries forward — almost unchanged — the old Section 80JJAA of the Income-tax Act, 1961. The idea is simple: if your business hires new employees and pays them properly, you get an extra deduction of 30% of the "additional employee cost" — over and above the salary you already deduct as a normal business expense. And you get this bonus 30% not once, but for three consecutive tax years.

In effect, for every rupee of eligible new salary you pay, you get to deduct ₹1.30 in the first year, and another ₹0.30 in each of the next two years — a total of 190% of the additional cost over three years. This directly lowers your taxable business profit.

Who can claim it

• Any assessee with income from business whose accounts are required to be audited under Section 63 of the 2025 Act (the tax-audit provision, the successor to old Section 44AB).
• It is available to companies, LLPs, firms and proprietors alike — the common thread is a business subject to tax audit.
• It applies whether you are under the old regime or the new regime — job-creation incentives of this kind were specifically retained.

The key conditions and limits

• 30% rate: Deduction equals 30% of the additional employee cost.
• Three years: Allowed for three consecutive tax years starting from the year the new employment is provided — even if the employee later leaves after year one (subject to the day-count rule below).
• ₹25,000 salary cap: An "additional employee" must have monthly emoluments not exceeding ₹25,000. Higher-paid staff simply do not count.
• Minimum days worked: The employee must be employed for at least 240 days in the tax year — reduced to 150 days for businesses making apparel, footwear or leather products. If the day-count is not met this year but is met in the next year, the employee is treated as new in that next year.
• PF enrolment: The employee must be enrolled in a recognised provident fund, and must not be one for whom the Government pays the entire EPS contribution (i.e. not covered fully under schemes like PMRPY).
• Payment mode: Emoluments must be paid by account-payee cheque, bank draft, or electronic clearing (bank transfer) — cash payment disqualifies that cost.

What "additional employee cost" and "emoluments" mean

• Additional employee cost = the total emoluments paid to additional employees during the year. Headcount must actually go up compared to the last day of the preceding year — if the total number of employees does not increase, the additional cost is nil.
• For a brand-new business, the emoluments paid to all employees in the first year are treated as additional employee cost.
• Emoluments means any sum paid for employment, but excludes the employer's contribution to pension/provident funds, and terminal payments like gratuity, leave encashment, severance, VRS and commutation of pension.

When the deduction is NOT allowed

• The business is formed by splitting up or reconstruction of an existing business.
• The business is acquired by transfer from another person or through business reorganisation. (A carve-out exists for units revived under Section 140(4) — the successor to old Section 33B — to support industrial revival.)
• The accountant's report is not furnished by the specified date. A report from a Chartered Accountant (historically Form 10DA) certifying the additional employee cost is mandatory.

How it interacts with other provisions

The 30% under Section 146 is in addition to the normal 100% salary deduction under the general business-expenditure rules — it is not a substitute. Eligibility is anchored to the tax-audit requirement (Section 63), and the accountant's report requirement links it to the compliance ecosystem. Because it reduces business profit, it flows through to your final tax under the applicable slab or corporate rate.

Practical implications

Labour-intensive businesses — manufacturing, hospitality, retail, BPO, textiles, food processing — benefit the most, because they hire many staff below the ₹25,000 threshold. To lock in the benefit, keep clean attendance/payroll records (to prove 240 or 150 days), pay salaries only through banking channels, ensure PF enrolment, and get the CA report filed before the due date. Missing any one condition can cost you the entire 30% for that batch of employees.