There may be various circumstances when an employee/retired person receives his salary/pension/compensation/gratuity in arrear or advance. In such circumstances, tax liability of an individual may be more in the current financial year because of shifting to a higher slab rate. In order to reduce the extra tax burden of the taxpayers, section 89 0f Income Tax Act has been incorporated by government, which permits a tax deduction to the taxpayers as an initiative for nullifying the extra tax burden created due to receiving such income in arrear or advance.

Framework of the relief:

Section 89 creates the eligibility for the relief, whereas Rule 21A prescribes mode of computation of relief, and Rule 21AA prescribes form 10E to be filed by employee or Government servant.

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:

Due to receipt of such arrears or advance, total income of assessee gets assessed at a rate higher than it would have otherwise been assessed. 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)]. Form 10E is available on the Income Tax India e-filing web portal. As per Circular No. 431 dated 12-9-1985,the relief u/s. 89 shall also be admissible in respect of encashment of leave salary by an employee when in service. The relief is to be given in the assessment in which the extra payment by way of arrears, advance, etc., is taxed.

Computation of relief u/s. 89 (Rule 21A):

• In respect of salary/family pension paid in arrears/advance:

• Calculate tax on total income, including the additional salary of the previous year in which the same is received; (ii) Calculate the tax on total income as reduced by the additional salary of the previous year in

which the same is received;

• Calculate the difference between tax at (i) and (ii) and the resultant figure is tax on additional salary in the year of receipt;

• Ascertain the previous years to which the additional salary relates;

• 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;

• 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;

• Calculate the difference between tax at (v) and (vi) and the resultant figure is tax on additional salary for the year to which it pertains;

• The excess of tax computed at (iii) over the tax computed at (vii) is the amount of relief admissible.

(B)  In respect of compensation on termination of employment:

Where compensation is received by 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. Relief u/s. 89(1) is admissible even/also in respect of compensation received under voluntary Retirement Scheme/Voluntary Separation Scheme, to the extent the same is taxable. An employee of public sector company 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 up to 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. These two sections being distinct in their scope, the assessee can claim the benefit u/s. 89 in respect of the amount in excess of the amount exempt under Section 10(10C).

Conclusion:

This tax relief is definitely an effective measure by government to ensure that taxpayers are not troubled with additional tax burden due to arrears. But, in order to get the benefit of this relief, taxpayers need to submit form 10E before filing of income tax return. Even if anyone fails to file form-E before filing of ITR, he can file it later with revised IT return and can get this benefit of relief. It should also be noted that the relief is only allowed when the tax liability of a taxpayer increases. If there is no increase in the tax liability, no relief can be claimed.