24 June 2023
Relief under Section 89 Section 89 grants relief in respect of salary, being a profit in lieu of salary under Section 17(3) of the Act. It is relevant to note in this context that any payment of gratuity other than payment referred to in Section 10(10), will form part of salary under Section 17(3)(ii) of the Act.
For the computation of relief under Section 89, Rule 21A of the I.T. Rules, 1962, prescribes the mode of computation of such relief. Rule 21A(1), inter-alia, covers a case where there is payment of gratuity in respect of the past services of the assessee / employee extending over a period of not less than five years in accordance with the provisions of Rule 21A (3) of the I.T. Rules, 1962. It covers only that portion of gratuity which remains after leaving out the portion exempt under Section 10(10) of the Act, because this portion will be included in the total income. The computation of relief under Section 89 may be summarized as follows- 1. Under Section 89, a relief can be claimed, if gratuity is received in excess of the limits specified under Section 10(10) of the Act. 2. However, no relief is admissible if taxable gratuity is in respect of services rendered for less than five years. 3. Cases in which the relief is admissible may be divided into two categories, namely, (a) where the gratuity is payable in respect of past service of 15 years or more, and (b) where such period is 5 years or more but less than 15 years.
4. Relief in a case belonging to the first category i.e. in 3(a) is worked out as under: (i) Compute the average rate of tax on the total income, including the gratuity in the year of receipt. (ii) Find out the tax on gratuity at the average rate of tax computed in (i) above. (iii) Compute the average rate of tax by adding one-third of the gratuity to the other income of each of the three preceding years. (iv) Find out the average of the three-average rates computed in the manner specified in (iii) above and compute the tax on gratuity at that rate. (v) The difference between the tax on the gratuity computed in (ii) and that in (iv), will be the relief admissible under Section 89. 5. In cases covered under the second category, the relief is computed on the similar lines as above, with the only difference that instead of average of the average rates of the preceding three years, the average of the rates of the preceding two years is computed by adding one-half of the gratuity to the other income of each of preceding two years.
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