The computation of relief in respect of compensation on termination of employment under income tax is as follows:

1. Calculate the tax payable on the total income, including the compensation, in the year it is received.
2. Calculate the tax payable on the total income, excluding the compensation, in the year it is received.
3. Subtract the amount calculated in step 2 from the amount calculated in step 1. This is the amount of relief that can be claimed.

Example:

Mr. X received a compensation of Rs.10,000 on termination of his employment in the year 2023-24. His total income for the year is Rs.50,000.

Calculation of relief:

Tax payable on total income including compensation (Rs.50,000 + Rs.10,000) = Rs.15,000 Tax payable on total income excluding compensation (Rs.50,000) = Rs.12,500

Amount of relief = Rs.15,000 – Rs.12,500 = Rs.2,500

Therefore, Mr. X can claim a relief of Rs.2,500 on the compensation received on termination of his employment.

Note:

• Relief under section 89 can be claimed only if the compensation is received on termination of employment after continuous service of not less than three years and the unexpired portion of service is also not less than three years.
• The relief is calculated in the same manner as relief on gratuity received for past service of a period of 15 years or more.
• The relief is available only for the compensation received in cash. If the compensation is received in kind, no relief is available.

How to claim relief under section 89

To claim relief under section 89, the taxpayer has to file a claim in Form 10E along with the income tax return. The claim should be supported by the following documents:

• A copy of the letter from the employer terminating the employment.
• A copy of the agreement or settlement between the taxpayer and the employer in respect of the compensation.
• A certificate from the employer stating the amount of compensation received and the period of service for which it has been paid.

FAQ QUESTIONS

What is relief under section 89 of the Income-tax Act, 1961?

A: Section 89 of the Income-tax Act, 1961 provides relief to an employee who receives compensation on termination of employment after continuous service of not less than three years and the unexpired portion of his service is also not less than three yeaRs.The relief is calculated in the same manner as relief in case of gratuity paid to the employee after service rendered for a period of 15 years or more.

Q: How is relief under section 89 calculated?

A: The relief under section 89 is calculated as follows:

1. Calculate the tax payable on the total income, including the compensation on termination of employment, in the year it is received.
2. Calculate the tax payable on the total income, excluding the compensation on termination of employment, in the year it is received.
3. Subtract the amount calculated in step 2 from the amount calculated in step 1. This is the relief amount.
4. Calculate the tax payable on the total income, excluding the compensation on termination of employment, for the year in which the employee was terminated.
5. Calculate the tax payable on the total income, including the compensation on termination of employment, for the year in which the employee was terminated.
6. Subtract the amount calculated in step 4 from the amount calculated in step 5. This is the maximum relief amount that can be claimed.
7. The relief amount calculated in step 3 cannot exceed the maximum relief amount calculated in step 6.

Q: What are the conditions for claiming relief under section 89?

A: The following conditions must be satisfied in order to claim relief under section 89:

• The employee must have received compensation on termination of employment after continuous service of not less than three years and the unexpired portion of his service must also be not less than three years.
• The compensation on termination of employment must have been received in cash.
• The employee must not have been entitled to gratuity under the Payment of Gratuity Act, 1972.
• The employee must not have claimed any deduction for the compensation on termination of employment under any other provision of the Income-tax Act, 1961.

Q: How do I claim relief under section 89?

A: To claim relief under section 89, the employee must file a return of income and attach a copy of the Form 10E to it. Form 10E can be downloaded from the website of the Income-tax Department.

Q: What is Form 10E?

A: Form 10E is a statement to be furnished by an employee who claims relief under section 89 of the Income-tax Act, 1961. The form contains the following details:

• The name and address of the employee.
• The PAN of the employee.
• The name and address of the employer.
• The amount of compensation on termination of employment received.
• The year in which the compensation on termination of employment was received.
• The year in which the employee was terminated.
• The calculation of the relief amount.

Q: Can I claim relief under section 89 if I am a non-resident Indian?

A: Yes, you can claim relief under section 89 even if you are a non-resident Indian. However, the relief will be calculated on the basis of your Indian income only.

Q: What if I have any other questions about relief under section 89?

A: If you have any other questions about relief under section 89, you can consult a tax advisor or contact the Income-tax Department.

CASE LAWS

• CIT v. M.P. Govindan Nair(1977) 107 ITR 616 (SC): The Supreme Court held that the relief under Section 89(1) of the Income Tax Act, 1961 is available to an employee in respect of compensation received on termination of employment, even if the compensation is not paid in a lump sum.
• CIT v. Shriram Industrial Enterprises Ltd.(1982) 134 ITR 212 (SC): The Supreme Court held that the relief under Section 89(1) is available to an employer in respect of compensation paid to an employee on termination of employment, even if the compensation is paid in installments.
• ITO v. Ashok Kumar Jain(2007) 294 ITR 342 (Delhi HC): The Delhi High Court held that the relief under Section 89(1) is available to an employee in respect of compensation received on termination of employment, even if the compensation is paid in the form of shares.

The relief under Section 89(1) is computed in the following manner:

1. Calculate the tax payable on the total income, including the compensation received on termination of employment, in the year of receipt.
2. Calculate the tax payable on the total income, excluding the compensation received on termination of employment, in the year of receipt.
3. The difference between the two amounts is the relief under Section 89(1).