Relief u/s.89 of IT Act: Section 89 of the Income Tax Act is a provision that helps individuals reduce the extra tax burden they may face due to receiving salary, pension, compensation, or gratuity in arrears or advance. Sometimes, an employee or retired person may receive their income for multiple years in a single financial year, either in arrears (payments for past years) or in advance (payments for future years). This can push them into a higher income tax slab for that particular year.
In the similar way, sometimes the problem arises because income tax rates in India are progressive, meaning that the tax rate increases with higher income. So, when you receive a lump sum payment, your tax liability for that year may be higher than if you had received the income in the respective years.
To mitigate this issue, Section 89 of the Income Tax Act allows taxpayers to claim relief for the additional tax liability incurred due to the lump sum income. This relief ensures that you are taxed at the average rate applicable to your income over the relevant years.
To calculate the relief under Section 89, you need to determine the tax payable on your total income for each of the relevant years separately, including the lump sum amount. Then, calculate the tax payable on your total income for each year as if you had received the income in the respective years. The difference between the two calculations is the relief you can claim. To claim relief under Section 89, you must fill out Form 10E and submit it to the Income Tax Department.
By utilizing Section 89, taxpayers can avoid the undue burden of paying higher taxes in the year they receive arrears or advance income. This provision ensures that they are taxed fairly, taking into account their average income over the relevant years rather than being penalized for receiving income in a lump sum.
Framework of the relief
Section 89 creates the eligibility for the relief, whereas Rule 21A prescribes the mode of computation of relief, and Rule 21AA prescribes form 10E to be filed for claiming the relief. From Assessment year 2014-15, Income Tax Department has made it mandatory to file form 10E by taxpayers who want to claim relief under section 89. Many of those claiming relief without filing the form have been issued notice for this non-compliance. So, it is important to file form 10E before filing of Income Tax Return.
Filing Form 10E of Income Tax
Form 10E is used to provide details regarding an employee’s total income and any arrears received. Submitting Form 10E digitally through the Income Tax Department’s e-portal is a convenient and efficient way to report your total income and any arrears received. Make sure to follow these steps diligently to ensure compliance with tax regulations. Here are the steps for submitting Form 10E digitally through the Income Tax Department’s e-portal:
(i) Access the Income Tax Department’s e-portal: To begin, visit the official e-portal of the Income Tax Department. If you’re a new user, you’ll need to create an account. If you already have an account, log in using your credentials.
(ii) Locate Form 10E: Once logged in, navigate to the income tax forms section on the portal. Look for “Form 10E” among the available forms.
(iii) Carefully Fill Out the Form: Open Form 10E and fill it out accurately. It’s crucial to provide correct and complete information. Be sure to double-check your entries.
(iv) Annexures (if applicable): Depending on your specific situation, you may need to attach relevant annexures. Here’s a brief guide on which annexure to use:
Annexure I: Use this annexure if you received arrear amounts.
Annexure II: If you received gratuity, use this annexure.
Annexure III: If you received compensation due to the termination of your job, this is the appropriate annexure to complete.
(v) Review and Submit: Before submitting Form 10E, review all the information you’ve provided for accuracy. Ensure that you’ve attached any necessary annexures. Once you’re satisfied with the form, click the “Submit” or equivalent button on the portal.
(vi) Acknowledgment and Record-keeping: After submission, you should receive an acknowledgment or confirmation of your submission. It’s essential to keep a copy of this acknowledgment for your records, as it serves as proof of filing.
(vii) Follow-Up: If there are any follow-up actions or responses required from the Income Tax Department, be sure to comply promptly.
Persons eligible for Relief under Section 89 of Income Tax
Any assessee in receipt of any kind of salary or profits in lieu of salary or family pension or gratuity, which is received in arrears or in advance.
Relevant Conditions
Due to receipt of such arrears or advance, total income of assessee gets assessed at a rate higher than it would have otherwise been assessed. The assessee being a government servant or an employee in a company, co-operative society, local authority, university, institution, association who is entitled to claim relief u/s. 89, may furnish to his employer, the particulars specified in Form 10E.
The employer in such case shall compute the relief u/s. 89 on the basis of such particulars and take it into account while deducting TDS [vide section 192(2A)]. Form 10E is available on the Income Tax India e-filing web portal. As per Circular No. 431 dated 12-9-1985, the relief u/s. 89 shall also be admissible in respect of encashment of leave salary by an employee when in service. The relief is to be given in the assessment in which the extra payment by way of arrears, advance, etc., is taxed.
Computation of relief u/s. 89 (Rule 21A)
In respect of salary/family pension paid in arrears/advance
(i) Calculate tax on total income, including the additional salary of the previous year in which the same is received;
(ii) Calculate the tax on total income as reduced by the additional salary of the previous year in which the same is received;
(iii) Calculate the difference between tax at (i) and (ii) and the resultant figure is tax on additional salary in the year of receipt;
(iv) Ascertain the previous years to which the additional salary relates;
(v) Calculate the tax on the total income as increased by the relevant additional salary in respect of each such previous years and total up such taxes for all such previous years;
(vi) Calculate the tax on total income without including such additional salary in respect of each such previous years and total up the taxes for all such previous years;
(vii) Calculate the difference between tax at (v) and (vi) and the resultant figure is tax on additional salary for the year to which it pertains;
(viii) The excess of tax computed at (iii) over the tax computed at (vii) is the amount of relief admissible.
In respect of compensation on termination of employment
Where compensation is received by assessee from his employer or former employer at or in connection with the termination of his employment after continuous service of not less than three years and the unexpired portion of his service is also not less than three years, then the relief is calculated in the same manner as if gratuity was paid to employee in respect of service rendered for a period of 15 years or more.
Relief u/s. 89(1) is admissible even/also in respect of compensation received under voluntary Retirement Scheme/Voluntary Separation Scheme, to the extent the same is taxable. An employee of public sector company receiving any amount on his voluntary retirement or termination of service or voluntary separation in accordance with the specified scheme, will either be entitled to exemption up to Rs. 5,00,000 under Section 10(10C) or relief under Section 89 of spreading the taxability of such income over several years, but not both. These two sections being distinct in their scope, the assessee can claim the benefit u/s. 89 in respect of the amount in excess of the amount exempt under Section 10(10C).
Conclusion
This tax relief is indeed an effective government measure aimed at ensuring that taxpayers are not burdened with additional tax payments due to arrears. To benefit from this relief, taxpayers are required to submit Form 10E before filing their income tax return. However, if someone fails to file Form 10E before submitting their tax return, they can still file it later along with a revised tax return to claim this relief.
It’s essential to note that this relief is only applicable when a taxpayer’s tax liability increases. If there is no increase in the tax liability, no relief can be claimed. It’s also important to note that tax laws and regulations may change over time, so it’s advisable to consult a tax professional or refer to the latest updates from the Income Tax Department for the most accurate and up-to-date information.
For computation of relief under section 89, you may follow the Income Tax Department-https://incometaxindia.gov.in/Pages/tools/relief-under-section-89.aspx
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Presumptive Taxation Scheme u/s. 44ADA & 44AE of Income Tax Act