Relief u/s. 89 of the Income Tax Act, 1961

 

Relief u/s. 89 is nothing but the tax relief available due to receipt of Salary arrears/ advances, so let's understand what is it and how and how to claim it.

1. Scenario in which Relief u/s. 89 is available :

We all know that the income received as salary is taxable on receipt basis, which may also includes salary arrears/ advance. Now, due to receipt of such arrears/ advance, the taxable salary of current year might get assessed at a rate higher than that at which it would otherwise have been assessed and due to which one may have to pay higher taxes. To avoid this unreasonable tax incidents, the relief has been granted u/s. 89 of the Income Tax Act, 1961 for the amount of difference in the tax liability arose due to receipt of arrears/ advances.

Further, it is important to note that relief is available only if tax liability for current year is getting higher due to receipt of such arrears/ advances but in case, if there is no extra tax liability the relief is also not available. 

Now, in the section 89 it has been provided that no such relief shall be granted in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company referred to in sub-clause (i) of clause (10C) of section 10, a scheme of voluntary separation, if an exemption in respect of any amount received or receivable on such voluntary retirement or termination of his service or voluntary separation has been claimed by the assessee under clause (10C) of section 10 in respect of such, or any other, assessment year. These are excluded for the purpose of claiming relief as separate exemption u/s. 10 is already available for these receipts. One needs to also note that, if the exemption u/s. 10 is not claimed then relief u/s. 89 is available.

Below are the links for Section 89 & Rule 21A:

• For Section 89 Click here
• For Rule 21A Click here

2. Step wise details for calculating relief u/s. 89 :

To calculate the relief, the following steps should be taken:

Step-1: Calculate tax payable for the current year on the total amount inclusive of arrears

 

Step-2: Calculate tax payable for the current year on the total amount exclusive of arrears

 

Step-3: Calculate the difference of the above two figures calculated in Step-1 & Step-2 and let's take this tax difference as 'X'

 

Step-4: Now, calculate tax payable for the year for which arrears have been received on the total amount inclusive of arrears

 

Step-5: Calculate tax payable for the year for which arrears have been received on the total amount exclusive of arrears

 

Step-6: Calculate the difference of the above two figures calculated in Step-4 & Step-5 and let's take this tax difference as 'Y'

 

Step-7: Now, here in this step, we will get the amount of relief u/s. 89 by subtracting amount of tax difference 'X' (Step-3) from 'Y' (Step-6). Please note that if the resulted amount is negative, then no relief is available.

To understand above step, let's consider the following example:

Particulars	Amount (Rs.)
Salary for Current Year (FY 2019-20) – A	5,50,000
Arrears for Prev. Year (FY 2018-19) – B	1,50,000
Total Salary, incl. arrears for Current Year (FY 2019-20) – C (A+B)	7,00,000
Tax on C above – D (Step-1)	54,600
Tax on A above – E (Step-2)	23,400
Difference – F (D-E) (Step-3)	31,200
Salary of Prev. Year (FY 2018-19) – G	3,00,000
Total Salary, incl. arrears for Prev.Year (FY 2018-19) – H (G+B)	4,50,000
Tax on H above – I (Step-4)	10,400
Tax on G above – J (Step-5)	-
Difference – K (I-J) (Step-6)	10,400
Relief u/s. 89 available for Current Year (FY 2019-20) - L (F-K) (if positive, otherwise Nil)(Step-7)	20,800

 

Points to note:

In the above example, we can see that due to receipt of arrears, tax liability of the current year gets increased by Rs. 31,200/- (Step-3). On the other hand, if the arrears were received in FY 2018-19 itself, the tax liability would have been Rs.10,400/- but actually assessed at Nil and accordingly taxes were been assessed less  by Rs. 10,400/- (Step-6). So, the relief is available for higher tax paid in FY 2019-20(Step-3), by considering the lower amount assessed in FY 2018-19(Step-6).

(Please note that the above calculations are made by considering the applicable tax rate for the mentioned years)

You may also, refer tools provided by the income tax department for calculation of the relief u/s. 89, in the below given link:

Calculator of Relief u/s. 89 - Income Tax department

3. Procedure for claiming relief u/s. 89 :

For claiming relief u/s. 89, one has to file Form 10E with the Income Tax department, non-filing of which might resulted in receiving notice from Income Tax department. It is nothing but declaration made by the taxpayer regarding details of relief to be claimed before filing the Return of Income. Form 10E can be filed by login into the e-fing portal and then under e-file tab by selecting Form 10E for the relevant Assessment Year.

Further, in reference to TDS calculations, Rule - 21AA of the income tax act provides that the person entitled to relief u/s. 89 (i.e., employee) may furnish form 10E to the person making payments of arrear (i.e., employer) to compute the relief on the basis of such particulars and take the same into account in making the deduction under of TDS. Therefore, the responsibility of filing form 10E is of employee and not of employer, employer would require it only for the purpose of computing TDS.

Below are the links for Form 10E format ans Rule 21AA:

• For Form 10E Click here
• For Rule 21AA Click here

4. Taxability of Arrears received by the Legal Heirs of the deceased person :

Below are the details of taxability of arrears in various scenarios:

• Lump-sum payment made gratuitously or by way of compensation or otherwise to widow or other legal heirs of an employee who dies while still in active service [Circular No. 573, dated 21-08-1990]: Fully exempt in the hands of widow or other legal heirs of employee

• Leave encashment paid to the legal heirs of the deceased employee: [Circular No. 309, dated 03-07-1981]: Payment is not in the nature of salary and hence not taxable

• Payment for PF & Superannuation fund: Exemption available u/s. 10(11), 10(12) & 10(13) in case of retirement of an employee, would squarely apply also where payment is made to legal heirs.

• Arrears paid on account of the Pay Revision:  If arrears of salary due to pay revision is sanctioned after death of assessee, no tax liability will be on legal heir, as there was no employer-employee relationship between employer and deceased employee on the date of accrual of arrears. But if the arrears were sanctioned before death of assessee and only received after his death, legal heir will be liable to pay tax on it. He/ She can claim relief u/s. 89 on such arrears. in this case PAN of legal heir should be quoted.

This is all, we could summarized about the arrears of Salary and relief available towards it. If you need more information or clarification about this, you can reach us via mail : mrinkblog@gmail.com

Advisory: Information relates to the law prevailing in the year of publication as indicated. The above article is only to enable public to have a quick and an easy understanding to analyze the provisions of the Act. Viewers are advised to ascertain the correct position/prevailing law before relying upon any document.