INCOME TAX

RELIEFS

SECTION 89

RELIEF WHEN SALARY/FAMILY PENSION/GRATUITY PAID IN ARREARS/ ADVANCE

Persons Covered

Any Assessee in receipt of any kind of salary or profits in lieu of salary or family pension or gratuity, which is received in arrears or in advance

Relevant Conditions

1. The assessee’s total income due to receipt of such arrears or advance gets assessed at a rate higher than that at which it would otherwise have been assessed.

2. The assessee being a government servant or an employee in a company, co-operative society, local authority, university, institution, association who is entitled to claim relief u/s. 89, may furnish to his employer, the particulars specified in Form 10E. The employer in such case shall compute the relief u/s. 89 on the basis of such particulars and take it into account while deducting TDS [vide section 192(2A)]

3. As per Circular No. 431 dated 12-9-1985 [156 ITR (st.) 82], the relief u/s. 89 shall be admissible in respect of encashment of leave salary by an employee when in service.

4. The relief is to be given in the assessment in which the extra payment by way of arrears, advance etc., is taxed.

5. In order to claim relief, the assessee should send an application to concerned assessing officer on plain paper.  

Relevant Percentage/ Amount

The method of computation of relief u/s. 89 is provided in Rule 21A of the Income Tax Rules, 1962. Basically, the relief u/s. 89 is arithmetical. It involves finding out two rates of tax. The first is the rate of tax applicable to the extra amount (arrears or advance) in the year of receipt. The second is finding out the rate of tax on extra amount for the years to which they relate. The difference between the two is the extent of relief. The mode of computation of relief for different types of receipts is given below:—

A. In respect of salary/family pension paid in arrears/ advance {Additional Salary}

1. Calculate tax on total income, including the additional salary of the previous year in which the same is received;

2. Calculate the tax on total income as reduced by the additional salary of the previous year in which the same is received;

3. Calculate the difference between tax at (1) and (2). The resultant figure is tax on additional salary in the year of receipt;

4. Ascertain the previous years to which the additional salary relates;

5. Calculate the tax on the total income as increased by the relevant additional salary in respect of each such previous years and total up such taxes for all such previous years;
6. Calculate the tax on total income without including such additional salary in respect of each such previous years and total up the taxes for all such previous years;

7. Calculate the difference between tax at (5) and (6). The resultant figure is tax on additional salary for the year to which it pertains;

8. The excess of tax computed at (3) over the tax computed at (7) is the amount of relief admissible.

B. In respect of Gratuity

a.

Where payment of gratuity is for past service of 15 years or more:—

1.

Calculate the tax on total income including the amount of gratuity [in excess of exempt u/s 10(10)] of the previous year in which gratuity is received;

2.

Find out the average rate of tax on total income by dividing the tax arrived at in (1) by the total income (including the amount of gratuity) of the previous year in which the gratuity is received;

3.

Find out tax payable on gratuity in year of receipt by multiplying the average rate of tax arrived at in (2) with the amount of gratuity;

4.

Add one-third of the amount of gratuity to the total income of each of the three years immediately preceding the previous year in which such gratuity is received;

5.

Find out tax on total income (after including one-third gratuity), for each of the three preceding previous years arrived at in (4);

6.

Find out the average rate of tax on total income of each of three preceding previous years by dividing the tax arrived at in (5) of the relevant previous year by the total income (including the amount of one-third gratuity) of that year;

7.

Total the average rates of these three years and divide the result by three in order to work out the average of these three average rates;

8.

Multiply the average of these three average rates arrived at as per (7) with the amount of gratuity received [in excess of exempt u/s 10(10)];

9.

The excess of tax computed at (3) over the tax computed at (8) is the amount of relief admissible.

b.

Where payment of gratuity is for past service >5 and <15:—

The method of calculating the relief will be the same as in (a) above except that the total income of each of the two (instead of three) immediately preceding previous years is to be increased by one-half (instead of one-third) of the amount of gratuity and accordingly average of average rates of preceding two years (instead of three) is to be computed.

c.

Where payment of gratuity is for past service of less than 5 Years:—

No relief is admissible in such cases.

C. In respect of compensation on termination of employment

Where the compensation is received by the assessee from his employer or former employer at or in connection with the termination of his employment after continuous service of not less than three years and the unexpired portion of his service is also not less than three years then, the relief is calculated in the same manner as if gratuity was paid to employee in respect of service rendered for a period of 15 years or more [same as (B)(a) above]. Relief u/s 89 (1) is admissible in respect of compensation received under Voluntary Retirement Scheme/Voluntary Separation Scheme, to the extent the same is taxable. The Finance Act (No. 2) 2009 has proposed that an employee receiving any amount on his voluntary retirement or termination of service or voluntary separation in accordance with the specified scheme, will either be entitled to exemption upto Rs. 5,00,000 under Section 10(10C) or relief under Section 89 of spreading the taxability of such income over several years, but not both. This amendment is introduced to negate the judicial view in CIT vs. J. Visalakshi (1993) 206 ITR 531 (Mad.), CIT vs. M. Raman (1997) 245 ITR 856 (Mad.) & CIT vs. G.V. Venugopal (2005) 273 ITR 307 (Mad.) that these two sections are distinct in their scope and hence the assessee can claim the benefit under Section 89 in respect of the amount in excess of the amount exempt under Section 10(10C).
 

D. In respect of Commutation of Pension

In case of commutation of pension [in excess of exempt u/s 10(10A)], the relief is calculated in the same manner as if gratuity was paid to employee in respect of service rendered for a period of 15 years or more [same as (B)(a) above].