Section 146 Report Requirements

Section 146 of the Income Tax Act, 2025 provides a deduction for additional employee cost incurred by businesses. This provision is designed to encourage employment generation by incentivising businesses to increase their workforce. Understanding the report requirements is essential for businesses claiming this deduction.

The Scope of the Deduction

If the gross total income of an assessee, to whom section 63 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 tax year shall be allowed.

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

Eligibility Conditions

Applicable Assessees

The deduction is available to assessees to whom section 63 (tax audit) applies. This includes:

Businesses with total sales, turnover or gross receipts exceeding the prescribed threshold
Professionals with gross receipts exceeding the prescribed threshold
Presumptive taxation cases where income declared is lower than deemed income

Ineligible Businesses

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

Exception

The condition regarding splitting up or reconstruction 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).

Definition of Additional Employee Cost

Additional Employee Cost

"Additional employee cost" means:

The total emoluments paid or payable to additional employees employed during the tax year
Emoluments paid or payable to employees employed during the tax year, where that year is the first year of a new business

In the case of an existing business, it shall be nil if:

There is no increase in the number of employees from the total number employed as on the last day of the preceding tax year
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

Additional Employee

"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.

Exclusions from Additional Employee

An employee is not treated as an additional employee if:

Total emoluments exceed Rs. 25,000 per month
The Government pays the entire contribution under the Employees' Pension Scheme
The employee does not participate in a recognised provident fund
Employed for less than 150 days in the case of apparel, footwear or leather manufacturing
Employed for less than 240 days in any other case

Emoluments

"Emoluments" means any sum paid or payable to an employee in lieu of his employment, but does not include:

Employer contributions paid or payable to any pension or provident fund or any other fund for the benefit of the employee as mandated by any law
Lump sum payments paid or payable to an employee at the time of termination of his service, superannuation, or voluntary retirement

Form 34: Report Requirements

What is Form 34?

Form No. 34 under the Income-tax Rules, 2026 is a mandatory report for audited assessees claiming deduction under Section 146. It replaces Form 10DA and must be filed along with the return of income and audit report.

Content of Form 34

Form 34 captures:

Employee count
Emoluments
Deduction computation

Certification

The form must be certified by a Chartered Accountant.

Due Date

Form 34 is required to be filed along with the Audit report under Section 63 of the Income-tax Act, 2025. Hence, the due date for filing audit report will be the due date to file this form.

Consequences of Non-Compliance

Disallowance of Deduction

If the assessee does not furnish the report of an accountant before the specified date as referred to in section 63, the deduction under Section 146 shall not be allowed.

Interest and Penalty

Interest and penalty may be levied on the amount of tax payable due to disallowance of deduction.

Expert Legal Guidance

Understanding the Section 146 report requirements is essential for businesses claiming the additional employee cost deduction. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping businesses prepare Form 34 reports and ensure compliance with all conditions.

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Section 146 Report Requirements — What Every Eligible Business Must Furnish