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Section 89 relief from Income-tax payable on the salary received in advance or in arrears

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Introduction

Receiving salary-in-arrears is very common for government and private employees because the appraisal happens after year end and salary is received later in subsequent years. Advance salary is taken by employees due to financial needs. Both salary-in-arrears and advance salary attract additional income taxes in the year of receipt.

As per income tax rules, an employee shall pay tax on salary income either on receipt basis or when the salary is due for the receipt, whichever is earlier. Therefore, where an employee receives arrears of salary pertaining to a preceding year or receives salary in advance (which is pertaining to subsequent months), the income tax liability arises in the period in which salary is received.

The income tax law provides relief in case of salary in arrears or salary in advance. The relief in this regard is provided (under section 89) to neutralize the increased tax burden. The computation of relief is done by assuming what would have been the income tax amount had the salary being received in the same period instead of arrears or advance.

Why there is a relief when the tax anyways had to be paid on salary?

The rationale of tax relief is that there should not be any additional tax on employee merely because the salary is received in arrears or advance. For instance, presume average tax rate in the Financial Year 18-19 was 20% and the average tax rate in Financial Year 19-20 is 25%. Suppose an employee having salary-in-arrears of Financial Year 18-19 received it in Financial Year 19-20 then he would be taxed at 25%. This caused an additional tax of 5%. The relief recognizes that had the salary of Financial Year 18-19 received in the same year itself, the employee would have paid tax at 20% only. Therefore, a tax relief of amount shall be given so that there is no additional tax burden on the employee of 5%.

Who can claim this relief?

Any employee who has received salary arrears or received a salary in advance can check whether he is eligible for relief or not.

When this relief is allowed?

Relief can be claimed for the receipt of following arrears during the current year:

  1. Salary received in arrears or in advance
  2. Premature withdrawal from PF account
  3. Arrears of family pension
  4. Gratuity
  5. Commuted value of pension
  6. Compensation on termination of employment

How to compute relief if salary is received in arrears?

If salary arrears of earlier years are received during the year, the relief shall be calculated in the following steps:

Step 1: Calculate tax on total income of the current year including arrears of salary.

Step 2: Calculate tax on total income of the current year excluding the arrears of Salary.

Step 3: Calculate tax on total income of the year to which the arrears relate to, including the arrears of Salary.

Step 4: Calculate tax on total income of the year to which the arrears relate to, excluding the arrears of Salary.

Step 5: Calculate the difference between (Step 1 minus Step 2) and (Step 3 minus Step 4)

Step 6: If the calculation in Step 5 is positive, such excess amount is allowed as a relief. If the result of Step 5 is negative, no relief shall be allowed to the employee.

How to compute relief if salary is received in advance?

If advance salary is received during the year, the relief shall be allowed in the year in which such advance salary actually falls due. The relief shall be calculated in the following steps:

Step 1: Calculate tax on total income (including advance salary) of the year in which advance salary is received.

Step 2: Calculate tax on total income (excluding advance salary) of the year in which advance salary is received.

Step 3: Calculate tax on total income (including advance salary) of the year to which advance salary falls due.

Step 4: Calculate tax on total income (excluding advance salary) of the year to which advance salary falls due.

Step 5: Calculate the difference between (Step 1 minus Step 2) and (Step 3 minus Step 4)

Step 6: If the calculation in Step 5 is positive, such excess amount is allowed as a relief. If the result of Step 5 is negative, no relief shall be allowed to the employee.

How to compute relief if provident fund is withdrawn before 5 years?

If an employee has not been in the continuous employment of 5 years or more as his job is terminated by reason of his ill health or discontinuance of the employer’s business or reasons beyond the control of the employee, the amount withdrawn from the provident fund account will be tax-exempt. In other scenarios, the amount withdrawn from the account is charged to tax in the hands of the employees. If the amount withdrawn from the provident fund account is taxable, the relief shall be calculated in the following steps:

Step 1: Calculate tax on total income of the current year including the taxable portion of the sum received on premature withdrawal from the provident fund.

Step 2: Calculate tax on total income of the current year excluding the taxable portion of the sum received on premature withdrawal from the provident fund.

Step 3: Calculate tax on total income of the year to which the above receipts relate after including such receipts.

Step 4: Calculate tax on total income of the year to which the above receipts relate after excluding such receipts.

Step 5: Calculate the difference between (Step 1 minus Step 2) and (Step 3 minus Step 4)

Step 6: If the calculation in Step 5 is positive, such excess amount is allowed as a relief. If the result of Step 5 is negative, no relief shall be allowed to the employee.

How to compute relief if gratuity amount is taxable?

The employee can claim relief only if he has completed 5 years of services. If gratuity received by the employee is eligible for tax exemption, no relief is admissible for such exempted portion of the gratuity. Only that portion of gratuity, which is in excess of the amount of exemption and is included in gross salary income, is eligible for relief. Where the whole amount of gratuity is exempt from tax, no relief is admissible.

The relief in such case shall be calculated in following steps:

Step 1: Calculate the average rate of tax on total income of the current year including the gratuity.

Step 2: Calculate tax on gratuity at the average rate of tax computed in Step 1.

Step 3: Calculate the average rate of tax of the previous 3 years after adding 1/3rd of gratuity to the total income of these 3 years.

Step 4: Calculate the average of average tax rates of the last 3 years computed in Step 3.

Step 5: Calculate tax on gratuity at the average rate of tax computed in Step 4.

Step 6: Calculate the difference between Step 2 and Step 5.

Step 7: If the calculation in Step 6 is positive, such excess amount is allowed as a relief. If the result of Step 6 is negative, no relief shall be allowed to the employee.

Where gratuity is payable in respect of past service of 5 years or more but less than 15 years, the relief shall be calculated in a similar fashion. However, instead of computing average of average rates of preceding 3 years, the average of rates of preceding 2 years is computed by adding one-half of the gratuity to the other income of each of preceding two years.

How to compute relief from compensation received on termination of employment?

If compensation is received by an employee due to termination of his employment after continuous service of 3 years or more and where the unexpired portion of his term of employment is also not less than 3 years, the relief is calculated in the same manner as if the gratuity was paid to the employee in respect of service rendered for a period of 15 years or more.

How to compute relief from commutation of pension?

Relief in respect of commutation of pension is computed in the same manner as if the gratuity was paid to the employee in respect of service rendered for a period of 15 years or more.

Frequently Asked Questions

Q: Is Section 89(1) relief allowed on voluntary retirement?

If any relief is claimed by an employee under Section 89(1) in respect of any amount received on voluntary retirement, no other exemption shall be allowed to him. It is advisable that an employee, who is otherwise eligible to claim exemption of up to Rs. 5,00,000 in respect of voluntary retirement compensation, should not claim relief under Section 89. In other words, the employee can claim either exemption up to Rs. 5,00,000 or relief under section 89 (1), but not both.

Q: How to claim relief?

The employee should claim the relief in the return of income for the year in which lump sum payment is received, except in case of advance salary where relief is available in the year in which such salary will due. An employee, who is entitled to claim relief under section 89, is required to submit Form 10E. It has to be filed online at the E-filing portal and has to be filed before filing of the Income-tax Return. It must be noted that Form 10E is to be filed up before filing of ITR. If you have filed up Form 10E after filing of ITR then Income-tax dept. might not allow section 89 relief claimed in ITR.

Q: How to e-file Form 10E?

Here, we have explained step-by-step process to e-file the Form 10E.

Step 1: Go to www.incometaxindiaefiling.gov.in and login with your PAN and Password.

Step 2: Go to E-File >Income Tax Forms from the menu

Step 3: Select Form 10E- Form for Relief u/s 89from the drop-down box of Form Name. Also choose the relevant Assessment Year* and Submission mode to continue further.

Step 4: Fill all the relevant information as required in various tabs given on the landing screen.

Step 5: Verify the Form and then Select Preview & Submit.

Step 6: You can download the PDF copy for preview. If you find any error or omission in the form, you can click on ‘Edit’ to make corrections in the form. If details entered are correct, one can proceed for final submission of Form. *Assessment Year is the year immediately next to the year in which income is received (except advance salary). For the financial year 2019-20, the assessment year shall be 2020-21. In other words, if arrears are received in March, 2020, the relevant assessment year shall be 2020-21.

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