Section 89(1) – Relief of Salary

Tax is calculated on the taxpayer's total income earned or received during the year. If the assessee has received any portion of salary 'in arrears or in advance’, or received a family pension in arrears, under the Income Tax Act it is allowed to claim tax relief under section 89(1). For a taxpayer, tax liabilities for a Financial Year are calculated from the income earned during that year. Sometimes, the income includes arrears (past dues paid in the current year). Usually, tax rates increase with time which means that the assessee may have to pay higher taxes in such a case. However, the Income Tax Act provides assessees relief in those situations u/s 89(1).

Relief under Section 89 (1)

Relief under section 89(1) for arrears of salary are available in the following cases:

Salary received in advance or as arrears
Gratuity
Compensation on Termination of employment
Commutation of Pension

Calculating Relief under Section 89 (1)

Certain steps have to be followed to calculate relief under section 89 (1). These steps are as follows:

Step 1: The taxpayer should find out the tax payable on his total income including arrears of the relevant previous year in which the same is received. (Ex: X)
Step 2: The taxpayer should then find out the tax payable on his total income excluding arrears. (Ex: Y)
Step 3: Subtract the value obtained in step 1 from the value obtained in step 2. (e., A-B) and keep the result value as Z.
Step 4: Find out the tax payable on the total income (including arrears) of the year to which the arrears are related. (Ex: “A”)
Step 5: Find out the tax payable on the total income (excluding arrears) of the year to which the arrears are related. (Ex: “B”)
Step 6: Subtract the value obtained in step 5 from the value obtained in step 4 (i.e., A – B). (Ex: “C”).
Excess of tax computed at step 3 over tax computed at step 7 is the amount of relief allowable under section 89. If tax computed at step 3 is less than tax computed at step 7 the taxpayer will not be eligible for any relief.

As per the Income Tax Act 1961, the Income Tax Section 89(1) a taxpayer can receive relief of salary relevant to the previous year’s earning. Section 89(1) is prominent since the 6th Pay Commission of the Central Government. Previously, this section was applicable only for relief of salary arising from gratuity income.

Gratuity Payment

The tax relief is available only if the gratuity is received in respect of the previous services of the assessee that is extended over a term period of not less than 5 years. In other words, no relief is granted if the term period of service is less than 5 years. The amount of tax relief is calculated as under:

Where the Gratuity paid in respect of past services of 15 Years or more

Step 1: Calculate the tax on the total income and also include the gratuity in the year of tax receipt of gratuity and calculate the average rate of tax (i.e.) (Total Tax / Total Income) x 100
Step 2: The tax to be calculated on gratuity on the basis of the average rate of the tax that is computed in step 1.
Step 3: The tax liability has to be calculated by adding 1/3 of the gratuity to the total income of each of the preceding 3 years and then calculate the average rate of the tax for each year separately.
Step 4: Now, calculate the average of the 3 average rates computed in step 3 above and compute the tax on the gratuity at that average rate.
Step 5: The excess, if any, of the tax on gratuity computed at step 2 over step 4 will be the relief that is admissible under section 89.

Where Gratuity is paid in respect of past services of 5 years or more but less than 15 years

The method for computation of relief is same except that in step 3 the number of years for calculating the average rate of tax would be taken as 2 instead of 3 and thus 1/2 of the gratuity will be added to the total income of the preceding 2 years instead of 3 years.

Compensation on Termination of Employment

Where the payment process is in nature of Taxable Compensation Received from the Employer or former Employer at or in combination with the Termination of Employment. The tax relief will be available only if the below-mentioned conditions are satisfied:

Compensation is received after the continuous services of not less than 3 years.
The unexpired part of the term of employment is also not less than 3 years.

The procedure for the calculation of tax relief is the same as given above, i.e. gratuity paid to the assessee in respect of services rendered for a term period of 15 years or more.

Commutation of Pension

The procedure for the calculation of tax relief is the same as given above, i.e. gratuity paid to the assessee in respect of services rendered for a term period of 15 years or more.

Other Cases

Concerning the payment falling under any other case, the CBDT would have regard to the conditions of each case and allow such tax relief as it deems fit.

Section 89(1) – Filing Form 10E

The Income Tax Department has made it mandatory to file Form 10E if a taxpayer wants to claim relief under Section 89(1). Where the assessee is a Government employee in a company, local authority, co-operative society, institution, university, association or body is entitled to the tax relief under section 89. In the case of other employees, the application for the tax relief would have to made to the assessing officer, instead of the employer. As per Section 89(1), tax relief is provided by recalculating tax for both the years, the year in which arrears are received and the year to which the arrears pertain. The taxes are adjusted assuming arrears were received in the year in which they were due. The prescribed steps have to be followed to file Form 10E. They are:

Step 1: Go to https://incometaxindiaefiling.gov.in/ and login with your ‘User ID’ (i.e. PAN), ‘DOB’ and ‘Password’.
Step 2: Click on the tab titled ‘e-File’ and select ‘Prepare & Submit Online Form (Other than ITR)’ from the drop-down menu.
Step 3: Choose ‘Form 10E’ from the drop-down menu.
Step 4: Fill the relevant Assessment Year and press ‘Continue’ button.
Step 5: The screen shown below with instructions to e-file Form 10E will become available.
Step 6: Click on all the blue tabs one by one and fill relevant details.
Step 7: Click on ‘Submit’ after completion to finalise the process.

In case the taxpayer is not able to complete the whole process at one go, it is possible to save the information filled by clicking on the ‘Save Draft’ button at the bottom of the screen and complete it any time later. In case if the assessee has saved the Form 10E in the draft, it can be completed later by following the same process flow as stated above.

Voluntary Retirement Scheme

No tax relief would be granted in respect of any amount that is received or receivable by an assessee on his voluntary retirement/ termination of the service, in accordance with any scheme or schemes of voluntary retirement or voluntary separation, if an exemption in respect of any amount that is received or receivable on such voluntary retirement or termination of the employment or voluntary separation has been claimed by the employee under section 10(10C) in respect of such, or any other, assessment year.