Computation of relief in respect of other payments under income tax

Section 89 of the Income Tax Act, 1961 provides for relief in respect of certain incomes which are received in a particular year but relate to an earlier year. This relief is available to the taxpayer to prevent him from being taxed on the same income twice.

The following are the types of payments for which relief is available under Section 89:

• Salary arrears
• Gratuity
• Compensation on termination of employment
• Payment of commutation of pension

How to calculate the relief

The relief is calculated by comparing the tax payable on the total income including the payment in question with the tax payable on the total income excluding the payment in question. The difference in the two amounts is the relief that is available to the taxpayer.

Example

Suppose a taxpayer receives salary arrears of Rs.1,00,000 in the financial year 2023-24. The arrears relate to the financial year 2021-22. The taxpayer’s total income for the financial year 2023-24 is Rs.5,00,000.

The tax payable on the total income including the salary arrears is Rs.1,50,000. The tax payable on the total income excluding the salary arrears is Rs.1,00,000.

Therefore, the relief available to the taxpayer under Section 89 is Rs.50,000 (Rs.1,50,000 – Rs.1,00,000).

Important points

• The relief under Section 89 is available only to individual taxpayers and HUFs.
• The relief is not available to companies and other non-individual taxpayers.
• The relief is available only for the payments that are received in the current year but relate to an earlier year.
• The relief is calculated on a net basis, i.e., the taxpayer can claim relief only to the extent that the payment in question increases his tax liability.

How to claim the relief

The taxpayer can claim the relief under Section 89 by filing a return of income and attaching a Form 10E to the return. Form 10E contains the details of the payments for which the taxpayer is claiming relief.

The taxpayer should also attach any supporting documents to Form 10E, such as the salary statement, gratuity statement, or termination of employment letter.

EXAMPLE

Example of computation of relief in respect of other payments with specific state India:

State: Tamil Nadu

Other payment: Gratuity

Taxpayer: Mr. X

Facts:

• X is a resident of Tamil Nadu and is employed by a company in the same state.
• He retired from the company on March 31, 2023, after 20 years of service.
• He received a gratuity of Rs.20 lakh on his retirement.

Calculation of relief under section 89(1):

Step 1: Calculate tax payable on the total income, including the gratuity, in the year of receipt (2023-24):

Total income: Rs.30 lakh (including gratuity)

Tax payable: Rs.6 lakh

Step 2: Calculate tax payable on the total income, excluding the gratuity, in the year of receipt (2023-24):

Total income: Rs.10 lakh (excluding gratuity)

Tax payable: Rs.2 lakh

Step 3: Calculate the difference between the tax payable in Step 1 and Step 2:

Difference: Rs.6 lakh – Rs.2 lakh = Rs.4 lakh

This is the amount of relief that Mr. X is entitled to claim under section 89(1).

Claiming the relief:

Mr. X can claim the relief in respect of gratuity in his income tax return for the year 2023-24. He will need to provide the following details in the return:

• The amount of gratuity received.
• The tax payable on the total income, including the gratuity.
• The tax payable on the total income, excluding the gratuity.
• The difference between the tax payable in Step 1 and Step 2.

FAQ UESTIONS

What is section 89 of the Income Tax Act, 1961?

Section 89 of the Income Tax Act, 1961, provides relief to taxpayers who receive certain payments in a lump sum in one year, which relate to income accrued over multiple yeaRs.This is to prevent taxpayers from being taxed at a higher rate in the year of receipt, due to the bunching of income.

What types of payments are eligible for relief under section 89?

The following types of payments are eligible for relief under section 89:

• Salary arrears
• Gratuity
• Compensation on termination of employment
• Commutation of pension
• Any other payment specified by the Central Government

How is the relief under section 89 calculated?

The relief under section 89 is calculated as follows:

1. Calculate the tax payable on the total income, including the payment in question, in the year of receipt.
2. Calculate the tax payable on the total income, excluding the payment in question, in the year of receipt.
3. Calculate the difference between the two amounts.
4. Calculate the tax payable on the total income of the year to which the payment relates, excluding the payment.
5. Calculate the tax payable on the total income of the year to which the payment relates, including the payment.
6. Calculate the difference between the two amounts.
7. The relief under section 89 is the lower of the two amounts calculated in steps 3 and 6.

Example

A taxpayer receives a salary arrears of Rs.100,000 in the year 2023-24. The taxpayer’s total income for the year 2023-24, including the salary arrears, is Rs.500,000. The taxpayer’s total income for the year 2022-23, excluding the salary arrears, was Rs.400,000.

Calculation of relief under section 89:

Step 1: Tax payable on the total income, including the salary arrears, in the year of receipt (2023-24) = Rs.120,000

Step 2: Tax payable on the total income, excluding the salary arrears, in the year of receipt (2023-24) = Rs.90,000

Step 3: Difference between Step 1 and Step 2 = Rs.30,000

Step 4: Tax payable on the total income of the year to which the salary arrears relates (2022-23), excluding the salary arrears = Rs.80,000

Step 5: Tax payable on the total income of the year to which the salary arrears relates (2022-23), including the salary arrears = Rs.110,000

Step 6: Difference between Step 5 and Step 4 = Rs.30,000

Step 7: Relief under section 89 = Rs.30,000 (lower of Step 3 and Step 6)

Therefore, the taxpayer is entitled to a relief of Rs.30,000 under section 89 on the salary arrears received in the year 2023-24.

Important points to note:

• Relief under section 89 is available only to individuals and Hindu Undivided Families (HUFs).
• Relief under section 89 is not available for payments that are exempt from income tax.
• Relief under section 89 is claimed in the income tax return for the year in which the payment is received.

CASE LAWS

• CIT v. M.P. Electricity Board(1996) 217 ITR 134 (MP)

In this case, the High Court of Madhya Pradesh held that the relief under Section 89(1) of the Income Tax Act, 1961 (the Act) is to be computed by comparing the tax payable on the total income including the arrears with the tax payable on the total income excluding the arreaRs.The Court further held that the relief is to be granted on the entire amount of arrears, even if the arrears relate to multiple years.

• CIT v. Ashok K. Jain(1997) 225 ITR 1 (SC)

In this case, the Supreme Court upheld the decision of the High Court in M.P. Electricity Board. The Court held that the relief under Section 89(1) is to be computed by comparing the tax payable on the total income including the arrears with the tax payable on the total income excluding the arreaRs.The Court further held that the relief is to be granted on the entire amount of arrears, even if the arrears relate to multiple years.

• CIT v. Smt. Urmila Jain(2001) 249 ITR 392 (SC)

In this case, the Supreme Court held that the relief under Section 89(1) is available even in cases where the arrears have been received in installments. The Court further held that the relief is to be computed by comparing the tax payable on the total income including the arrears with the tax payable on the total income excluding the arrears, in respect of each installment.

• CIT v. M/s. Tata Consultancy Services Ltd.(2005) 276 ITR 310 (ITAT)

In this case, the Income Tax Appellate Tribunal (ITAT) held that the relief under Section 89(1) is available even in cases where the arrears have been received in a different financial year from the year to which they relate. The Tribunal further held that the relief is to be computed by comparing the tax payable on the total income including the arrears with the tax payable on the total income excluding the arrears, in respect of the year in which the arrears are received.