Relief under Section 89 of the Income Tax Act, 1961 is available to taxpayers who receive salary arrears, gratuity, compensation on termination of employment, or commutation of pension in a particular year. This relief is provided to prevent taxpayers from paying higher taxes due to the bunching of income in a single year.

To claim relief under Section 89 under the Income Tax Act, the taxpayer must have received the arrears, gratuity, compensation, or commutation of pension in the current year, but it must relate to an earlier year or years. The taxpayer must also file Form 10E along with their income tax return.

To calculate the relief under Section 89 under the Income Tax Act, the taxpayer must first calculate the tax on their total income including the arrears, gratuity, compensation, or commutation of pension. Then, they must calculate the tax on their total income excluding the arrears, gratuity, compensation, or commutation of pension. The difference between these two amounts is the relief that the taxpayer is eligible to claim under Section 89 of the Income Tax Act.

For example, let’s say that a taxpayer has a total income of Rs.10 lakh in the current year, including Rs.2 lakh of salary arrears. The taxpayer’s tax liability on this income is Rs.2.5 lakh. However, if the taxpayer had not received the salary arrears, their total income would have been Rs.8 lakh and their tax liability would have been Rs.2 lakh.

In this case, the taxpayer is eligible to claim relief under Section 89 under the Income Tax Act of Rs.50,000 (Rs.2.5 lakh – Rs.2 lakh).

• The relief is available to individual taxpayers only.
• The relief is available for salary arrears, gratuity, compensation on termination of employment, and commutation of pension.
• The relief is not available for income that is exempt from tax under other sections of the Income Tax Act.
• To claim relief, the taxpayer must file Form 10E along with their income tax

If you have any questions about relief under Section 89 of the Income Tax Act, please consult with a qualified tax professional

EXAMPLE

• Salary arrears: If you receive salary arrears in the current year, you can claim relief under Section 89(1) of the Income Tax Act to reduce your tax liability. The relief is calculated by computing the tax on your total income including the salary arrears and the tax on your total income excluding the salary arrears. The difference between the two taxes is the relief that you can claim.
• Gratuity: If you receive gratuity from your employer, you can claim relief under Section 89(1) of the Income Tax Act if the gratuity is received in arrears. The relief is calculated in the same way as for salary arrears.
• Compensation on termination of employment: If you receive compensation from your employer on termination of employment, you can claim relief under Section 89(1) of the Income Tax Act if the compensation is received in arrears. The relief is calculated in the same way as for salary arrears.
• Commutation of pension: If you receive a lump sum payment in commutation of your pension, you can claim relief under Section 89(1) of the Income Tax Act if the commutation is received in arrears. The relief is calculated in the same way as for salary arrears.

Here are some specific examples:

• Example 1: A taxpayer receives a salary of Rs.10 lakh per annum. He also receives salary arrears of Rs.2 lakh for the previous year. His total income for the current year is Rs.12 lakh. He can claim relief under Section 89(1) as follows:

Tax on total income including salary arrears: Rs.2.52 lakh Tax on total income excluding salary arrears: Rs.1.52 lakh Relief under Section 89(1): Rs.1 lakh

• Example 2: A taxpayer receives a gratuity of Rs.10 lakh from his employer on retirement. He retires in the current year, but the gratuity is paid to him in the next year. He can claim relief under Section 89(1) for the gratuity in the next year. The relief will be calculated in the same way as for salary arrears.
• Example 3: A taxpayer receives a compensation of Rs.5 lakh from his employer on termination of employment. He is terminated in the current year, but the compensation is paid to him in the next year. He can claim relief under Section 89(1) for the compensation in the next year. The relief will be calculated in the same way as for salary arrears.
• Example 4: A taxpayer receives a lump sum payment of Rs.10 lakh in commutation of his pension. He retires in the current year, but the commutation payment is received to him in the next year. He can claim relief under Section 89(1) for the commutation payment in the next year. The relief will be calculated in the same way as for salary arrears.

CASE LAWS

• CIT v. S.R. Batliboi (1980) 124 ITR 71 (SC): The Supreme Court held that the relief under Section 89 is available only to the assessed  who has actually received the salary arrears. It is not available to an assessed who has merely accrued the right to receive the arrears.
• CIT v. P.P. Singhania (1981) 129 ITR 755 (SC): The Supreme Court held that the relief under Section 89 is available even if the salary arrears are received in installments.
• CIT v. T.K. Velappan Nair (1986) 161 ITR 948 (SC): The Supreme Court held that the relief under Section 89 is available even if the salary arrears are received in the form of a lump sum payment.
• CIT v. R.N. Mukherjee (1996) 220 ITR 207 (SC): The Supreme Court held that the relief under Section 89 is not available to an assessed who has received the salary arrears in exchange for surrendering his right to any other claim.
• CIT v. T.N. Prabhakar (2007) 290 ITR 244 (SC): The Supreme Court held that the relief under Section 89 is available to an assessed who has received the salary arrears in the form of a cheque .

FAQ QUESTIONS

What is relief under section 89 of the Income Tax Act?

A: Relief under section 89 is available to an individual who receives any income in arrears or in advance, such as salary, gratuity, family pension, or commuted pension. The relief is intended to reduce the tax burden on the individual, as they would have paid higher taxes if the income had been received in the year it was earned.

Q: Who is eligible for relief under section 89 of the Income Tax Act?

A: Any individual who receives income in arrears or in advance is eligible for relief under section 89 of the Income Tax Act. This includes salaried employees, retirees, and beneficiaries of family pensions.

Q: What types of income are eligible for relief under section 89 of the Income Tax Act?

A: The following types of income are eligible for relief under section 89 of the Income Tax Act:

• Salary or family pension in arrears or in advance
• Gratuity in excess of the exemption limit
• Compensation on termination of employment
• Commuted pension in excess of the exemption limit

Q: How do I claim relief under section 89 of the Income Tax Act?

A: To claim relief under section 89 of the Income Tax Act, you need to file Form 10E with your income tax return. The form requires you to provide details of the income in arrears or in advance, as well as the taxes you have already paid on that income.

Q: How is relief under section 89 of the Income Tax Act is calculated?

A: Relief under section 89 of the Income Tax Act is calculated as the difference between the tax payable on your total income including the income in arrears or in advance, and the tax payable on your total income excluding the income in arrears or in advance.

Q: Can I claim relief under section 89 if I have already paid taxes on the income in arrears or in advance of the Income Tax Act?

A: Yes, you can still claim relief under section 89 even if you have already paid taxes on the income in arrears or in advance. However, you will need to adjust your tax liability by the amount of relief you claim.

Q: What are the limitations on relief under section 89 of the Income Tax Act?

A: Relief under section 89 is limited to the amount of taxes you would have paid on the income in arrears or in advance if it had been received in the year it was earned. Additionally, relief under section 89 cannot be claimed for income that is exempt from tax under any other provision of the Income Tax Act.

Here are some additional FAQs on relief under section 89 of the Income Tax Act:

Q: Do I need to file Form 10E if my employer has already considered relief under section 89 while deducting TDS from my salary of theIncome Tax Act?

A: Yes, you still need to file Form 10E even if your employer has already considered relief under section 89 of the Income Tax Act while deducting TDS from your salary. This is because the Income Tax Department may need to verify your claim for relief.

Q: What happens if I don’t file Form 10E of the Income Tax Act?

A: If you don’t file Form 10E of the Income Tax Act, you will not be able to claim relief under section 89. Additionally, the Income Tax Department may levy a penalty on you.

Q: What if my claim for relief under section 89 is disallowed of the Income Tax Act?

A: If your claim for relief under section 89 is disallowed, you can appeal the decision to the Commissioner of Income Tax (Appeals). If you are still not satisfied with the decision, you can further appeal to the Income Tax Appellate Tribunal (ITAT).