Friday, December 27, 2013

Income Tax :- Income Tax relief under section 89

Who can avail income tax relief under section 89 ?
              An individual receives any potion of his salary in arrears or in advance or receives profit in lieu of salary, he can claim relief in terms of section 89 read with rule 21A.   The relief is also available in respect of family pension received in arrears. 

Computation of relief when salary or family pension has been received in arrears or in advance [Rule 21A(2)]
          The relief on salary received in arrears or in advance (hereinafter to be referred as "the additional salary") is computed in the manner laid down in rule 21A(2) as under :

  • 1. Calculate the tax payable on the total income, including the additional salary of the relevant previous year in which the same is received. 
  • 2. Calculate the tax payable on the total income, excluding the additional salary of the relevant previous year in which the same is received. 
  • 3. Find out the difference between the tax at (1) and (2). 
  • 4. Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates. 
  • 5. Compute the tax on the total income after including the additional salary in the previous year to which such salary relates. 
  • 6. Find out the difference between the tax at (4) and (5).
  • 7. The excess of tax computed at (3) over the tax computed at (6) is the amount of relief admissible under section 89(1).   No relief is, however, admissible if the tax computed at (3) is less than the tax computed at (6).   In such a case, the assessee-employee need not apply for relief. 

Computation of relief in respect of gratuity [Rule 21A(3)]
          Under section 89(1), a relief can be claimed if gratuity is received in excess of the limits specified in para 12.2.   However, no relief is admissible if taxable gratuity is in respect of services rendered for less than five years.   Cases in which the relief is admissible may be divided into two categories, namely, (i) where the gratuity payable is in respect of past service of 15 years or more; and (ii) where such period is 5 years or more but then than 15 years.   Relief in a case belonging to the first category is worked out as under :
  • 1. Compute the average rate of tax on the total income including the gratuity in the year of receipt.
  • 2. Find out the tax on gratuity at the average rate of tax computed at (1) above. 
  • 3. Compute the average rate of tax by adding one-third of the gratuity to the other income of each of the three preceding years. 
  • 4. Find out the average of the three average rates computed in the manner specified in (3) above and compute the tax on gratuity at that rate. 
  • 5. The difference between the tax on gratuity computed at (2) and that at (4) will be relief admissible under section 89(1). 
          In cases covered under the second category, the relief is computed on similar lines as above with the only difference that instead of average of the average rates of the preceding three years, the average of the rates of the preceding two years is computed by adding one-half of the gratuity to the other income of each of the preceding two year. 

Computation of relief in respect of compensation on termination of employment [Rule 21A(4)]
           If compensation is received by the assessee from the employer or former employer at or in connection with termination of his employment after continuous service for not less than 3 years and where the unexpired portion of his term of employment is also not less than 3 year, the relief is calculated in the same manner as if gratuity was paid the employee in respect of service rendered for a period of 15 years or more.   Compensation received at the time of voluntary retirement from service would be regarded as salary and relief under section 89 would be admissible in respect of said amount.

Computation of relief in respect of payment in commutation of pension [Rule 21A(5)]
                  A relief can be claimed in respect of payment in commutation of pension received in excess of the limits mentioned in pension under section 17(i)(ii) .   Such relief is computed in the same manner as if gratuity was paid to the employee in respect of service rendered for a period of 15 years or more.

Computation of relief in respect of other payments [Rule 21A(6)]
                    In respect of payment received by the employee other than those mentioned in (Computation of relief when salary or family pension has been received in arrears or in advance [Rule 21A(2)] and Computation of relief in respect of payment in commutation of pension [Rule 21A(5)] above, the relief under section 89(1) will be granted by the Board after examining the circumstances of each individual case.

 Procedure for claiming the tax relief. 
        In order to claim tax relief under the aforesaid circumstances the assessee should send an application on plain paper to the concerned Assessing Officer.  In the absence of any specific time limit for such application,  it may be submitted at the time of filing the return of income. 

      Basically, the relief under section 89 is arithmetical.   It involves finding out of two rates of tax.   The First is the rate of tax applicable to the total income including the extra amount in the year of receipt.   The second is finding out the rate by adding the arrears tot he total income of the years to which they relate.   For this purpose, the Assessing Officer should ask for a true and authentic statement of the total income of the earlier years to which the arrears pertain.   There is, therefore, no warrant for issuing a notice under section 148 or calling for returns of income of earlier years- Circular No. 331, dated March 22, 1982.
  • To Download free 89(1) Relief  or 10E Excel based Calculator for Assessment Year 2014-15 & others (Click Here)

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