SALARY INCOME- RELEIF U/S 89(1)
RELIEF U/S 89(1)
In case of relief when salary has been received in arrears or in advance:
Method of calculating the relief:
- Calculate the tax payable on the total income, including the additional salary of the relevant previous year in which the same is received. (receipt basis).
- Calculate the tax payable on the total income, excluding the additional salary of the relevant previous year in which the same is received. (receipt basis).
- Find out the difference in tax between (1) and (2) as calculated above.
- Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates. (accrual basis).
- Compute the tax on the total income after including the additional salary in the previous year to which such salary relates. (accrual basis).
- Find out the difference in tax between (4) and (5) as calculated above.
- The excess of tax computed at (3) over the tax computed at (6) is the amount of relief admissible u/s 89(1). No relief is however admissible if the tax computed at (3) is less than the tax computed at (6). In such a case the assessee – employee need not apply for relief.
Example: during the previous year ending March 31, 1999, X, a salaried employee received Rs. 1,62,000 as basic salary and Rs. 20,000 as arrears of bonus of the financial year 1992-93. During the previous year 1992-93, X received Rs. 50,000 as salary. X deposits Rs 1,500 (in 1992-93) and Rs. 10,000 (in 1998-99) in PPF.
|
Particulars |
Taxable income and tax on receipt basis. |
Taxable income and tax on accrual basis. |
||
|
AY 1999-2000 |
AY 1993-1994 |
AY 1999-2000 |
AY 1993-1994 |
|
| Salary |
1,62,000 |
50,000 |
1,62,000 |
50,000 |
| Arrears Salary |
20,000 |
- |
- |
20,000 |
| Gross Salary |
1,82,000 |
50,000 |
1,62,000 |
70,000 |
| Less Std. Ded. |
20,000 |
12,000 |
20,000 |
12,000 |
| Gross Total Income |
1,62,000 |
38,000 |
1,42,000 |
58,000 |
| Other Income |
- |
- |
- |
- |
| Net Income |
1,62,000 |
38,000 |
1,42,000 |
58,000 |
| Tax on Net Income |
22,600 |
2,000 |
17,400 |
6,800 |
| Less Rebate u/s 88 |
2,000 |
300 |
2,000 |
300 |
| Net tax liability |
20,600 |
1,700 |
15,400 |
6,500 |
| Tax liability of the 2 assessment years on receipt basis |
22,300 |
|||
| Tax liability of the 2 assessment years on accural basis |
21,900 |
|||
| Relief u/s 89(1) 22,300 less 21,900 |
400 |
|||
| Tax payable for the AY 1999-2000 (20,600 less 400) |
20,200 |
|||
Computation of relief in respect of gratuity:
A relief can be claimed if gratuity is received in excess of the limits specified u/s 10(10). It can be claimed if service rendered is more than five years.
Method of computation of relief:
- Compute the average rate of tax on the total income including the gratuity in the year of receipt.
- Find out the tax on gratuity at the average rate of tax computed at (1) above.
- Compute the average rate of tax by adding one – third of the excess gratuity to the other income of each of the three preceeding years. ( in case the service rendered is more than 5 years and less than 15 years, add one – half of the excess gratuity to the other income of each of the 2 preceeding years.)
- Find out the average of the three rates (2 rates in case the service rendered is more than 5 years and less than 15 years) as computed in (3) above and compute the tax on gratuity at that rate.
- The difference between the tax on gratuity computed at (2) and that at (4) will be the relief admissible u/s 89(1).
Computation of relief in respect of compensation on termination of employment:
It shall be computed as computed for relief in respect of gratuity for service rendered for a period of 15 years or more.
Relief shall be computed only if service rendered is more than 3 years and a balance of not less than 3 years service.
Computation of relief in respect of payment in commutation of pension:
It shall be computed as computed for relief in respect of gratuity for service rendered for a period of 15 years or more.
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