The Income Tax Department has outlined the manner in which taxpayers can calculate relief under Sections 157 and 158 of the Income-tax Act, 2025, as amended by the Finance Act, 2026.
The provisions are particularly relevant for individuals who receive certain income in lump-sum form, such as salary arrears, advance salary, gratuity or pension, as well as resident individuals holding specified foreign retirement benefit accounts.
Relief Under Section 157 for Salary Arrears and Other Lump-Sum Receipts
Section 157 provides relief where a taxpayer faces a higher tax liability because income relating to earlier years is received and taxed in the current year. The objective is to broadly place the employee in the position they would have been in if the income had been taxed in the year to which it actually relates.
The relief can apply to the following receipts:
- Salary received in arrears or in advance
- Arrears of family pension
- Premature withdrawal from a provident fund account
- Gratuity
- Commuted value of pension
- Compensation received on termination of employment
An employee claiming this relief must claim it in the return for the year in which the lump-sum amount is received and furnish Form No. 39 on or before the due date for filing the income-tax return.
How Relief on Salary Arrears and Advance Salary Is Calculated
For advance salary, salary arrears, family pension and certain premature PF withdrawals, the Income Tax Department has prescribed a five-step calculation.
The taxpayer first calculates tax on total income for the current year including the relevant receipt. Tax is then calculated on current-year income after excluding that receipt.
Next, tax is calculated for the year to which the receipt relates, both excluding and including the relevant amount.
The difference between the additional tax arising in the current year and the additional tax that would have arisen in the relevant earlier year determines the relief. If the resulting amount is positive, the excess is available as relief. If the result is negative, no relief is available.
Special Rules for Gratuity Relief
Relief relating to gratuity is subject to a minimum service condition. An employee must have completed at least five years of service to claim relief in respect of gratuity.
Importantly, relief is available only for the taxable portion of gratuity included in gross salary. If a portion of gratuity is eligible for deduction from salary, that deductible portion does not qualify for relief.
For gratuity relating to 15 years or more of past service, the calculation involves comparing the tax on gratuity at the average tax rate of the current year with the tax calculated using the average of the average tax rates of the preceding three tax years, after adding one-third of the gratuity to the income of each of those years.
For gratuity relating to five years or more but less than 15 years, a similar method applies. However, instead of using three preceding tax years, the calculation uses the preceding two tax years, with one-half of the gratuity added to the income of each year.
Relief on Compensation for Termination of Employment
An employee receiving compensation on termination may also qualify for relief under Section 157.
Where the employee has completed at least three years of continuous service and the unexpired portion of the employment term is also at least three years, the relief is calculated in the same manner as gratuity relating to 15 years or more of service.
There is also an important restriction for voluntary retirement compensation. A taxpayer cannot claim both the specified deduction of up to ₹5 lakh for voluntary retirement compensation and Section 157 relief. The taxpayer has to choose between the two.
Relief on Commuted Pension
Relief for commuted pension is calculated using the same methodology applicable to gratuity received in respect of 15 years or more of service.
Section 158: Relief for Foreign Retirement Benefit Accounts
Section 158 addresses a different situation. It provides a resident individual with an option to defer taxation of income earned from specified foreign retirement benefit accounts.
Instead of paying tax in India in the year the income accrues, an eligible individual can opt to have the income taxed in the year in which it is taxed upon withdrawal or redemption in the notified foreign country.
To qualify, the individual must:
- Be a resident of India in the year in which the relief is claimed.
- Have opened a specified retirement benefits account in a notified country.
- Have been a non-resident of India and resident of that country when the account was opened.
- Hold an account where the income is not taxed on an accrual basis but is taxed by that country upon withdrawal or redemption.
The option is exercised by filing Form No. 40 on or before the due date for filing the income-tax return. Once exercised, the option applies to subsequent tax years and cannot be withdrawn.
What Happens If the Individual Later Becomes a Non-Resident?
The provision also contains a specific rule for a taxpayer who becomes non-resident after exercising the Section 158 option.
In such a situation, the taxpayer is deemed never to have exercised the option. The income accrued in the specified retirement account from the year in which the option was exercised until the tax year immediately preceding the year in which the individual becomes non-resident becomes taxable accordingly.
Forms to Remember
For taxpayers dealing with these provisions, the relevant forms are particularly important:
| Provision | Purpose | Form |
|---|---|---|
| Section 157 | Relief for eligible arrears, advance salary and other specified receipts | Form No. 39 |
| Section 158 | Option to defer taxation of eligible foreign retirement account income | Form No. 40 |
The Income Tax Department's document also confirms these requirements through its explanatory questions and answers.
Why These Relief Provisions Matter
Taxing a large lump-sum receipt entirely in the year of receipt can sometimes result in a higher tax burden than if the income had been taxed in the year to which it actually relates.
Section 157 addresses this issue for specified employment-related receipts by providing a mechanism to calculate and grant relief where the prescribed conditions are satisfied.
Section 158, meanwhile, provides a specific mechanism for eligible resident individuals with certain foreign retirement accounts, allowing them to align the timing of Indian taxation with the taxation of the income in the notified foreign country.
Taxpayers should carefully check the applicable conditions, calculation method and filing deadlines before claiming either relief. The Income Tax Department itself advises users to verify the provisions against the applicable Acts, Rules and Notifications.
CAclubindia
