May 142015
 

Relief under section 89

Meaning

It is the amount deducted from tax payable for the year in which it is received. The detail provision as to applicability and manner of availing this relief is in section 89 and further mode of computation is given in rule 21A. Here an attempt is made to explain this concept with the help of practical case study.

When relief can be used

This relief can be avail in the following cases:

  1. An individual receives any portion of his salary in arrears or
  2. Salary received in advance or
  3. Salary received in the form of profit in lieu of salary
  4. When a salaried employee received gratuity in the following cases
    • Where gratuity payable is in respect of past service of 15 years or more
    • Where such period is 5 years or more but less than 15 Years
  5. Compensation received on termination of employment
  6. Payment received in commutation of pension
  7. Any other cases where CBDT may allow

Computation of relief when salary has been received in arrears or in advance

The relief on salary received in arrears or in advance is computed as under:

  1. Calculate the tax payable on the total income, including the salary received in arrears or in advance, of the relevant previous year in which the same is received.
  2. Calculate the tax payable on the total income, excluding the salary received in arrears or in advance, of the relevant previous year in which the additional salary is received.
  3. Find out the difference between tax at (1)and (2).
  4. Compute the tax on the total income after including the salary received in arrears or in advance in the previous year to which such salary relates.
  5. Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates.
  6. Find out the difference between tax at (4) and (5).
  7. Amount of relief: The excess of tax computed at (3)over tax computed at (6)

No relief is, however admissible if tax computed at (3) is less than tax computed at (6)

If the additional salary relates to more than one previous year, salary would be spread over the previous year to which it pertains in the manner explained above.

Case study

During the previous year ending March 31, 2015, Mr X, a salaried employee (age: 40years),received Rs.10,67,000/- as basic salary and Rs.20,000/- as arrears of bonus of the financial year 1992-93.

During the previous year 1992-93, Mr X has received Rs. 50,000/- as salary. Mr X deposits Rs.1,500/- (during1992-93)and Rs.10,000/- ( during 2014-15) in public provident fund. Now calculation if relief can be given as under:

The admissible relief under section 89 in respect of bonus paid in the financial year 2014-15 will be computed as under :

Taxable income and tax liability in the year of receipt Taxable income and tax liability in the year of accrual
Previous Year 2014-15

Rs.

1993-94

Rs.

2014-15

Rs.

1993-94

Rs.

(1) (5) (2) (4)
Salary 10,67,000 50,000 10,67,000 50,000
Arrears of salary 20,000 - - 20,000
Gross salary 10,87,000 50,000 10,67,000 70,000
Less: standard deduction under section 16(i) Nil 12,000 Nil 12,000
Gross total income 10,87,000 38,000 10,67,000 58,000
Less: Deduction under section 80C 10,000 Nil 10,000 Nil
Net income 10,77,000 38,000 10,57,000 58,000
Tax on net income 1,48,100 2,000 1,42,100 6,800
Less: Rebate under section 88 Nil 300 Nil 300
Tax 1,48,100 1,700 1,42,100 6,500
Add: Surcharge Nil - Nil -
Tax and surcharge 1,48,100 1,700 1,42,100 6,500
Add: Education cess 2,962 - 2,842 -
Add:Secondary and higher education cess 1,481 1,421
Tax liability 1,57,693 1,700 1,51,513 6,500

 Now rebate may be calculated in either of two methods given below:

Method 1 Method 2
Difference between (1) & (2) = (3) 6180 Tax liability of the two assessment year on receipt basis 159393
Difference between (4) & (5) = (6) 4800 Tax liability of the two assessment year on accrual basis 158013
Difference, i.e., excess of (3) over (6) 1380 Difference, i.e., excess of (3) over (6) 1380