Apart from tax rule on regular income, it is very important for each employee to be aware of the various relief of salary under taxation rules covered under Sec. 89 (1) of the Income Tax Act. Relief of salary can come in the form of terminal benefits at the time of termination of employment or salary received as arrears or in advance. These benefits are bound to push the income onto a substantially higher tax slab.
To mitigate the hardships caused to the assessee in such situations, ITOs are empowered to grant appropriate relief u/s 89 (1), on receipt of an application from the assessee. However, u/s 192 (2A), government servants or an employee in a company, co-operative society, local authority, university, institution, association or body may furnish the particulars in Form-10E and get the relief directly from employer.
If leave encashment is received during employment, it is chargeable to tax, irrespective of whether the employee is in government or private service. The employee can, however, claim relief in terms of Sec. 89.
Salary in arrears or in advance
The relief on salary received in arrears or in advance is computed in the manner laid down in rules 21A and 21AA as follows:
- Calculate difference between the taxes payable of the relevant previous year in which the additional salary is received excluding the additional salary and including it in the total income.
- Calculate the difference between the taxes payable on the total income after excluding the additional salary and including it in the previous year to which such salary relates.
- The amount of relief admissible u/s 89 = A - B. No relief is admissible if ‘A - B’ is negative.
If the additional salary relates to more than one previous year, salary would be spread over the previous years to which it pertains in the manner explained above.
These computations have to take cognisance of the rebates, deductions, surcharge and cess available in respective years. The fact that the assessee would have made additional contributions to such avenues has to be ignored.
Family pension received in arrears by family members of a deceased employee is also eligible for benefit under Sec. 89 (1).
Sec. 89 (1) & VRS
FA09 has negated several judicial pronouncements by mandating that VRS exemption u/s 10 (10C) will not be applicable if a person has claimed relief u/s 89 & vice versa.
Compensation on termination
If the service is continuous for not less than 3 years and the unexpired term of employment is not less than 3 years, the relief offered is as if the gratuity was for service of 15 or more years.
Commutation of pension
Relief can be claimed in respect of payment in commutation of pension in excess of the limits mentioned in the Act. Such relief is computed in the same manner as if the gratuity was paid to the employee for service of 15 years or more.
Relief can be claimed if gratuity is received in excess of the limits specified in the Act. However, no relief is admissible if taxable gratuity is in respect of services rendered for less than 5 years. The relief is worked out as under:
When the service is for 15 years or more —
- Compute average rate of tax on the total income, including the gratuity in the year of receipt.
- Compute tax on gratuity at this rate.
- Compute average rate of tax by adding one-third of the gratuity to the other income of each of the 3 preceding years.
- Take average of the 3 rates computed in the manner specified in ‘c’ above and compute the tax on gratuity at that rate.
The relief admissible u/s 89(1) = B - D.
When service is for 5 years or more but less than 15 years —
The relief is computed on similar lines. The only difference is that instead of the average of the average rates of the preceding 3 years, the average of 2 years is computed by adding half of the gratuity to the other income of each of the preceding 2 years.
The authors A.N Shanbhag and Sandeep Shanbhag are leading financial advisors. Write to them at firstname.lastname@example.org