SALARY INCOME- RELEIF U/S 89(1)

SALARY INCOME- RELEIF U/S 89(1)

RELIEF U/S 89(1)

In case of relief when salary has been received in arrears or in advance:

Method of calculating the relief:

1. Calculate the tax payable on the total income, including the additional salary of the relevant previous year in which the same is received. (receipt basis).
2. Calculate the tax payable on the total income, excluding the additional salary of the relevant previous year in which the same is received. (receipt basis).
3. Find out the difference in tax between (1) and (2) as calculated above.
4. Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates. (accrual basis).
5. Compute the tax on the total income after including the additional salary in the previous year to which such salary relates. (accrual basis).
6. Find out the difference in tax between (4) and (5) as calculated above.
7. The excess of tax computed at (3) over the tax computed at (6) is the amount of relief admissible u/s 89(1). No relief is however admissible if the tax computed at (3) is less than the tax computed at (6). In such a case the assessee – employee need not apply for relief.

Example: during the previous year ending March 31, 1999, X, a salaried employee received Rs. 1,62,000 as basic salary and Rs. 20,000 as arrears of bonus of the financial year 1992-93. During the previous year 1992-93, X received Rs. 50,000 as salary. X deposits Rs 1,500 (in 1992-93) and Rs. 10,000 (in 1998-99) in PPF.

Particulars	Taxable income and tax on receipt basis.		Taxable income and tax on accrual basis.
	AY 1999-2000	AY 1993-1994	AY 1999-2000	AY 1993-1994
Salary	1,62,000	50,000	1,62,000	50,000
Arrears Salary	20,000	-	-	20,000
Gross Salary	1,82,000	50,000	1,62,000	70,000
Less Std. Ded.	20,000	12,000	20,000	12,000
Gross Total Income	1,62,000	38,000	1,42,000	58,000
Other Income	-	-	-	-
Net Income	1,62,000	38,000	1,42,000	58,000
Tax on Net Income	22,600	2,000	17,400	6,800
Less Rebate u/s 88	2,000	300	2,000	300
Net tax liability	20,600	1,700	15,400	6,500
Tax liability of the 2 assessment years on receipt basis				22,300
Tax liability of the 2 assessment years on accural basis				21,900
Relief u/s 89(1) 22,300 less 21,900				400
Tax payable for the AY 1999-2000 (20,600 less 400)				20,200

Computation of relief in respect of gratuity:

A relief can be claimed if gratuity is received in excess of the limits specified u/s 10(10). It can be claimed if service rendered is more than five years.

Method of computation of relief:

1. Compute the average rate of tax on the total income including the gratuity in the year of receipt.
2. Find out the tax on gratuity at the average rate of tax computed at (1) above.
3. Compute the average rate of tax by adding one – third of the excess gratuity to the other income of each of the three preceeding years. ( in case the service rendered is more than 5 years and less than 15 years, add one – half of the excess gratuity to the other income of each of the 2 preceeding years.)
4. Find out the average of the three rates (2 rates in case the service rendered is more than 5 years and less than 15 years) as computed in (3) above and compute the tax on gratuity at that rate.
5. The difference between the tax on gratuity computed at (2) and that at (4) will be the relief admissible u/s 89(1).

Computation of relief in respect of compensation on termination of employment:

It shall be computed as computed for relief in respect of gratuity for service rendered for a period of 15 years or more.

Relief shall be computed only if service rendered is more than 3 years and a balance of not less than 3 years service.

Computation of relief in respect of payment in commutation of pension:

It shall be computed as computed for relief in respect of gratuity for service rendered for a period of 15 years or more