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relief u/s.89

krishnamoorthy (student) (81 Points)

10 November 2017

I want to know how/when to use this section in case of salaries.

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CA Ankit R Momaya (Partner at Bhat Momaya & Associates) (2304 Points)
Replied 10 November 2017

An employee may receive any arrear or advance salary or salary for more than 12 months etc. In such a case, the assessee might have to pay higher taxes as the arrear /advance salary are taxed in the year of receipt of the same and not in the year in which they are actually due. The difference in tax liability in due year and in receipt year might be due to changes in the slab rates. For this reason, the provision of relief u/s 89 comes in.

Relief is available under following cases:

Salary received in arrears or in advance;
Salary for more than 12 months in one financial year;
Family Pension being paid in arrears;
Gratuity;
Compensation on termination of employment; and
Commuted Pension

To calculate relief, the following steps should be taken:

Step 1: Calculate the tax due in the current year, firstly by including the arrears in your total income and then by excluding the arrears from your total income. Then take the difference of these two figures and let’s call the difference as ‘X’.

Step 2: Calculate your tax due (or the actual tax paid) in the year for which the arrears have been received, firstly by including the arrears in your total income and then by excluding the arrears from your total income. Then take the difference of these two figures and let’s call the difference as ‘Y’.

Step 3: The figure you get when you subtract X from Y is your relief amount.

This can be better understood with the help of the example below:

Suraj earned Rs. 15,00,000 p.a. in FY 2016-17 and also received an arrear of Rs. 3,00,000 p.a. for FY 2014-15. His total salary in FY 2014-15 was Rs. 6,00,000 p.a.

The table below explains the calculation of relief:

Particulars	Tax liability for F.Y. 2016-17		Tax Liability for F.Y. 2014-15
	Salary inclusive of arrears	Salary without arrears	Salary inclusive of arrears	Salary without arrears
	(1)	(2)	(3)	(4)
Salary	18,00,000	15,00,000	9,00,000	6,00,000
Income Tax	3,65,000	2,75,000	1,05,000	45,000
Cess	10,950	8,250	3,150	1,350
Total Tax Liability	3,75,950	2,83,250	1,08,150	46,350
Step 1: Tax at (1) – Tax at (2)	92,700		–
Step 2: Tax at (3) – Tax at (4)	–	61,800	–	–
Relief u/s 89 : Step 1 – Step 2	30,900
Tax payable :- Tax at (1) – Relief	3,45,050

Relief under section 89 = X-Y = 92700-61800=30900.

You may submit Form 10E for claiming such relief to your employer. Also, you must submit Form 10E online on the Income Tax Website before filing the Return of Income. Your salary slips serve as proof of receipt of arrears and should be kept safely. One important thing to note is that relief can only be claimed if tax paid is actually higher due to receipt of such arrears. If there is no extra tax liability, relief is not allowed. In case of VRS Compensation being received by the employee no relief shall be granted under Section 89 if he has claimed exemption u/s 10(10C) for Voluntary Retirement Scheme. An assessee can claim either exemption under section 10(10C) or relief u/s 89 and not both together.