Deduction in respect of additional employee cost
[Section-146 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 146(1) of Income Tax Act 2025
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.
Section 146(2) of Income Tax Act 2025
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.
Section 146(3) of Income Tax Act 2025
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.
Section 146(4) of Income Tax Act 2025
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.
Section 146(5) of Income Tax Act 2025
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.
FAQs on Section 146 of Income Tax Act 2025
What is the deduction available under section 146(1) of the Income Tax Act, 2025?
A deduction of 30% of the additional employee cost incurred during the tax year is allowed, subject to conditions.
Who is eligible to claim the deduction under section 146?
The deduction is available to an assessee to whom section 63 applies and whose gross total income includes profits and gains from business.
For how many years can the deduction be claimed?
The deduction can be claimed for three consecutive tax years starting from the year in which the employment is provided.
Is the deduction available to new businesses?
Yes, new businesses are eligible and can claim the deduction if other specified conditions are satisfied.
Can an existing business claim the deduction?
Yes, but only if there is an increase in the number of employees compared to the last day of the previous tax year.
What is meant by ‘additional employee cost’?
It means the emoluments paid or payable to additional employees employed during the tax year or in the first year of a new business.
When is the additional employee cost treated as nil?
It is treated as nil if there is no increase in the number of employees or if emoluments are not paid via specified banking modes.
What are acceptable modes of payment for emoluments?
Payments must be made through account payee cheque, account payee bank draft, electronic clearing system, or prescribed electronic modes.
Who qualifies as an ‘additional employee’?
An employee who is employed during the tax year and increases the total employee count over the preceding year’s last day.
Which employees are excluded from being ‘additional employees’?
Employees are excluded if their emoluments exceed ₹25,000/month, government pays full EPS contribution, they are not in PF, or employed for too few days.
How many minimum working days are required for employees in apparel, footwear, or leather industries?
A minimum of 150 days in the tax year, or they must complete this in the succeeding year to qualify.
What is the minimum period of employment for other businesses?
Employees must be employed for at least 240 days in the tax year, or in the succeeding year to qualify.
Can employees who meet the minimum day requirement in the following year still qualify?
Yes, they will be deemed as additional employees of the succeeding tax year.
What does ’emoluments’ include?
It includes any amount paid or payable to an employee for employment, excluding employer contributions to funds and lump sum termination-related payments.
Are employer contributions to PF or gratuity included in emoluments?
No, such contributions and lump sum termination-related payments are excluded from emoluments.
Can the deduction be claimed if the business is formed by splitting up or reconstruction?
No, the deduction is not allowed if the business is formed by splitting up or reconstruction of an existing business.
Is the deduction allowed if the business is acquired through transfer or reorganisation?
No, the deduction is not allowed in case of acquisition through transfer or business reorganisation.
What report must be submitted to claim the deduction?
A report of an accountant with prescribed particulars must be furnished before the specified date under section 63.
Is there any exception to the restriction on businesses formed by reconstruction?
Yes, if the business is revived under section 140(4), the restriction does not apply.
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