Relief for Arrear Salary Under Section 89

Relief under section 89 is allowable to mitigate the extra tax burden that arises due to receipt of any sum, being paid as arrear or in advance resulting in increase in tax liability.
Relief u/s 89 is available in the following situations:

• salary being received in arrears or advance;
• where the payment is in the nature of gratuity in respect of past services extending over a period of not less than five years is received;
• where the payment is in the nature of compensation received by the employee in connection with termination of his employment after continuous service of not less than three years and where the unexpired portion of the term of employment is also not less than three years and the same has not been claimed as deduction under other section;
• where the payment is in the nature of commutation of pension;
• where the payment is in the nature of family pension.

Basis of Calculation:

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