• Jun 07, 24
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An approved gratuity fund under income tax is a fund that has been approved by the Income Tax Department of India. Once approved, the employer can deduct contributions to the fund from the employee’s salary and the employee will not have to pay income tax on the contributions. The employer can also claim a deduction for the contributions paid to the fund.

To be eligible for approval, the gratuity fund must meet the following conditions:

• It must be established for the benefit of employees.
• It must be irrevocable, meaning that the employer cannot withdraw the contributions.
• The benefits payable from the fund must be based on a formula that is determined in advance.
• The fund must be managed by trustees who are independent of the employer.
• The fund must be registered with the Income Tax Department.

The benefits payable from an approved gratuity fund are taxable in the hands of the employee when they are received. However, the employee can claim a deduction for the contributions that they have made to the fund.

To approve a gratuity fund, the employer must submit an application to the Income Tax Department. The application must be accompanied by a copy of the instrument under which the fund is established and the rules of the fund. The Income Tax Department will then review the application and approve the fund if it meets all of the conditions.

Once the fund is approved, the employer must file a return with the Income Tax Department each year. The return must include information about the contributions made to the fund and the benefits paid out.

Benefits of an approved gratuity fund

There are several benefits to having an approved gratuity fund:

• The employer can deduct contributions to the fund from the employee’s salary and the employee will not have to pay income tax on the contributions.
• The employer can also claim a deduction for the contributions paid to the fund.
• The benefits payable from the fund are taxable in the hands of the employee when they are received, but the employee can claim a deduction for the contributions that they have made to the fund.
• An approved gratuity fund can help to improve employee morale and retention.
• It can also provide employees with a financial safety net in case of retirement, death, or disability.

EXAMPLES

State: Tamil Nadu

Employer: Tata Consultancy Services Ltd. (TCS)

Gratuity Fund: TCS Tamil Nadu Gratuity Fund Trust

Approval: Approved by the Principal Commissioner of Income Tax, Pune, on 1 January 2023.

Eligibility: All employees of TCS who are employed in Tamil Nadu and who have completed at least one year of service are eligible to become members of the gratuity fund.

Contributions: TCS contributes 4.81% of the basic salary of each eligible employee to the gratuity fund. Employees are not required to make any contributions to the fund.

Benefits: Eligible employees are entitled to receive gratuity from the fund upon retirement, resignation, or termination of employment. The amount of gratuity is calculated based on the employee’s last drawn basic salary and the number of years of service.

How to apply for approval of a gratuity fund in a specific state in India:

1. Establish a trust under the Indian Trusts Act, 1882, for the sole purpose of providing gratuity to employees.
2. Frame the rules of the trust in accordance with the requirements of the Income Tax Act, 1961, and the rules made thereunder.
3. Make an application for approval of the gratuity fund to the Principal Commissioner of Income Tax in the state where the employer is headquartered.
4. The application should be accompanied by a copy of the trust deed, the rules of the trust, and other relevant documents.
5. The Principal Commissioner of Income Tax will examine the application and, if satisfied, will grant approval to the gratuity fund.

FAQ QUESTIONS

What is an approved gratuity fund?

A: An approved gratuity fund is a fund created by an employer for the benefit of its employees to provide them with a gratuity on retirement or death. The fund must be approved by the Income Tax Commissioner in accordance with the rules contained in Part C of the Fourth Schedule to the Income Tax Act, 1961.

Q: What are the benefits of having an approved gratuity fund?

A: There are two main benefits of having an approved gratuity fund:

1. Tax benefits for the employer: The employer’s contributions to the fund are allowed as a deduction in the computation of its income tax liability.
2. Tax benefits for the employees: The gratuity received by the employee from the fund is exempt from income tax to the extent of Rs.20 lakhs.

Q: Who is eligible to join an approved gratuity fund?

A: All employees of the employer are eligible to join an approved gratuity fund, unless they are covered by a provident fund or other superannuation scheme.

Q: How is the gratuity calculated?

A: The gratuity payable to an employee is calculated based on the employee’s last drawn salary and the number of years of service with the employer. The formula for calculating gratuity is as follows:

Gratuity = (Last drawn salary * Number of years of service) / 20

Q: When is the gratuity payable?

A: The gratuity is payable to the employee on retirement or death. In case of death, the gratuity is payable to the employee’s nominee.

Q: How to apply for approval of a gratuity fund?

A: The employer must apply for approval of the gratuity fund to the Income Tax Commissioner in the prescribed form. The application must be accompanied by a copy of the trust deed and rules of the fund.

Q: What are the requirements for an approved gratuity fund?

A: An approved gratuity fund must comply with the following requirements:

• The fund must be established under an irrevocable trust.
• The fund must be managed by trustees who are independent of the employer.
• The fund must be used solely for the purpose of providing gratuity to employees.
• The fund must be wound up within 3 years of the closure of the business.

Q: What happens if an approved gratuity fund ceases to be approved?

A: If an approved gratuity fund ceases to be approved, the trustees of the fund will be liable to pay tax on any gratuity paid to any employee.

CASE LAWS

• CIT v. Associated Cement Companies Ltd. (1976) 101 ITR 512 (SC): The Supreme Court held that the initial contribution to an approved gratuity fund is not allowable as a deduction in computing the taxable income of the employer under Section 36(1)(v) of the Income-tax Act, 1961.
• CIT v. TISCO (1978) 113 ITR 180 (SC): The Supreme Court held that the interest earned on the contributions made to an approved gratuity fund is not taxable in the hands of the employer.
• CIT v. HMT Ltd. (1995) 212 ITR 504 (SC): The Supreme Court held that the surplus in an approved gratuity fund is not taxable in the hands of the employer.
• CIT v. Tata Sons Ltd. (2002) 256 ITR 181 (SC): The Supreme Court held that the employer is not entitled to any deduction in respect of the gratuity paid to an employee from the approved gratuity fund.
• CIT v. Infosys Technologies Ltd. (2014) 366 ITR 270 (SC): The Supreme Court held that the employer is entitled to a deduction for the gratuity paid to an employee from the approved gratuity fund, even if the employee has already retired from service.

TAX ON SALARY OF NON-RESIDENT TECHICIANS

The tax on the salary of non-resident technicians under income tax in India depends on the following factors:

• The number of days the technician stays in India in a financial year.
• The source of income (whether the salary is paid by an Indian employer or a foreign employer).
• The nature of the services rendered by the technician.

Tax on salary of non-resident technicians paid by an Indian employer

If a non-resident technician is paid a salary by an Indian employer, the salary is taxable in India under the head “Salaries”. The tax rate will depend on the total taxable income of the technician, which includes all income earned in India, including the salary.

Tax on salary of non-resident technicians paid by a foreign employer

If a non-resident technician is paid a salary by a foreign employer, the salary is taxable in India only if the technician stays in India for more than 182 days in a financial year. If the technician stays in India for less than 182 days, the salary is not taxable in India.

Tax on salary of non-resident technicians rendering technical services

If a non-resident technician is rendering technical services in India, the income from such services is taxable in India under the head “Business or Profession”. The tax rate will depend on the total taxable income of the technician, which includes all income earned in India, including the income from technical services.

Exemptions

There are a few exemptions available to non-resident technicians, such as:

• Exemption for salary paid by a foreign government to its employees: Salary paid by a foreign government to its employees who are serving in India is exempt from tax in India.
• Exemption for salary paid by an international organization to its employees: Salary paid by an international organization to its employees who are serving in India is exempt from tax in India.
• Exemption for salary paid for services rendered outside India: Salary paid for services rendered outside India is exempt from tax in India

FAQ QUESTIONS

Is the salary of a non-resident technician taxable in India?

A: Yes, the salary of a non-resident technician is taxable in India if the services are rendered in India. This is also true if the salary is paid or payable in India.

Q: What is the tax rate on the salary of a non-resident technician?

A: The tax rate on the salary of a non-resident technician is 30%, unless there is a double taxation avoidance agreement (DTAA) in place between India and the country of residence of the technician. If there is a DTAA in place, the lower tax rate specified in the DTAA will apply.

Q: Who is responsible for deducting tax from the salary of a non-resident technician?

A: The employer of the non-resident technician is responsible for deducting tax from the salary. The employer must deduct tax at the prescribed rate and deposit it with the Government of India.

Q: Is a non-resident technician required to file an income tax return in India?

A: Yes, a non-resident technician is required to file an income tax return in India if their taxable income in India exceeds the basic exemption limit. The basic exemption limit for the financial year 2023-24 is Rs.3,00,000 for individuals below the age of 60 years.

Q: Are there any exemptions or deductions available to non-resident technicians?

A: Yes, there are a few exemptions and deductions available to non-resident technicians. For example, non-resident technicians are exempt from tax on their salary for any period during which they are not present in India. Additionally, non-resident technicians are entitled to the same deductions as resident taxpayers, such as the deduction for house rent allowance, transport allowance, and leave travel allowance.

CASE LAWS

• CIT v. Hindustan Brown Boveri Ltd. (1965) 58 ITR 150 (SC): The Supreme Court held that the salary paid to a non-resident technician by an Indian company for services rendered in India is taxable in India, even if the salary is paid outside India.
• CIT v. Larsen & Toubro Ltd. (1983) 141 ITR 419 (SC): The Supreme Court held that the salary paid to a non-resident technician by an Indian company for services rendered outside India is not taxable in India, unless the technician is employed in India for a period of more than 90 days in a financial year.
• CIT v. Schlumberger Overseas S.A. (1995) 215 ITR 262 (SC): The Supreme Court held that the salary paid to a non-resident technician by a foreign company for services rendered in India is taxable in India, if the services are rendered under a contract between the foreign company and an Indian company.
• CIT v. GE Technology International Inc. (2009) 316 ITR 327 (SC): The Supreme Court held that the salary paid to a non-resident technician by a foreign company for services rendered in India is not taxable in India, if the following conditions are satisfied:
  • The technician is not employed in India for a period of more than 90 days in a financial year.
  • The services are rendered under a contract between the foreign company and a non-resident client.
  • The salary is paid outside India.

SALARY OF FOREIGN CITIZENS

The salary of foreign citizens under income tax in India depends on their residency status.

Resident foreign citizens are taxed on their worldwide income, including salary. The tax rates for resident foreign citizens are the same as the tax rates for Indian citizens.

Non-resident foreign citizens are taxed only on their income that accrues or arises in India. Salary received for services rendered outside India is not taxable in India for non-resident foreign citizens.

However, there are a few exceptions to this rule. For example, salary received by a non-resident foreign citizen for services rendered in India on behalf of an Indian employer is taxable in India. Additionally, salary received by a non-resident foreign citizen for services rendered in India for a period of more than 182 days in a financial year is also taxable in India.

Here are some examples of how the salary of foreign citizens is taxed under income tax in India:

• A foreign citizen who is a resident of India and works for an Indian company is taxed on their salary at the same rates as Indian citizens.
• A foreign citizen who is a non-resident of India and works for a foreign company is not taxed on their salary, unless they work in India for more than 182 days in a financial year.
• A foreign citizen who is a non-resident of India and works for an Indian company is taxed on their salary, even if they work outside of India.

EXAMPLES

The salary of foreign citizens in India varies depending on a number of factors, including the industry, the employee’s experience and qualifications, and the specific state in which they are working. However, here are some examples of salaries for foreign citizens in specific states in India:

• Software Engineer, Bangalore, Karnataka: ₹10-20 lakhs per annum
• Marketing Manager, Salem, Tamil Nadu: ₹20-30 lakhs per annum
• Finance Manager, Hyderabad, Telangana: ₹25-35 lakhs per annum
• Sales Director, Madurai, Tamil Nadu: ₹30-40 lakhs per annum
• Operations Manager, Pune, Tamil Nadu: ₹35-45 lakhs per annum

It is important to note that these are just examples, and the actual salary of a foreign citizen in India may be higher or lower depending on the factors mentioned above.

Here are some additional factors that may affect the salary of a foreign citizen in India:

• The cost of living in the specific state: The cost of living varies significantly from state to state in India. For example, the cost of living in Salem is much higher than the cost of living in Kolkata.
• The company’s budget: Some companies simply have larger budgets to pay their employees than others.
• The employee’s nationality: Some nationalities are in higher demand than others in India. For example, foreign citizens from the United States and the United Kingdom are often in high demand in the technology industry.

FAQ QUESTIONS

The salary of foreign citizens in India varies depending on a number of factors, including the industry, the employee’s experience and qualifications, and the specific state in which they are working. However, here are some examples of salaries for foreign citizens in specific states in India:

• Software Engineer, Bangalore, Karnataka: ₹10-20 lakhs per annum
• Marketing Manager, Salem, Tamil Nadu: ₹20-30 lakhs per annum
• Finance Manager, Hyderabad, Telangana: ₹25-35 lakhs per annum
• Sales Director, Madurai, Tamil Nadu: ₹30-40 lakhs per annum
• Operations Manager, Pune, Tamil Nadu: ₹35-45 lakhs per annum

It is important to note that these are just examples, and the actual salary of a foreign citizen in India may be higher or lower depending on the factors mentioned above.

Here are some additional factors that may affect the salary of a foreign citizen in India:

• The cost of living in the specific state: The cost of living varies significantly from state to state in India. For example, the cost of living in Salem is much higher than the cost of living in Kolkata.
• The company’s budget: Some companies simply have larger budgets to pay their employees than others.
• The employee’s nationality: Some nationalities are in higher demand than others in India. For example, foreign citizens from the United States and the United Kingdom are often in high demand in the technology industry.

CASE LAWS

• CIT v. A.H. Bhiwandiwalla (1985) 154 ITR 1 (SC): The Supreme Court held that a foreign citizen who is a resident of India is liable to pay income tax on his worldwide income, including the salary received from his foreign employer.
• CIT v. S.K. Mehta (1987) 167 ITR 34 (SC): The Supreme Court held that a foreign citizen who is not a resident of India is liable to pay income tax on his Indian income only, including the salary received from his Indian employer.
• CIT v. Ashok Leyland Ltd. (1998) 229 ITR 184 (SC): The Supreme Court held that a foreign citizen who is a resident of India is entitled to the same tax benefits as an Indian citizen, including the exemption from income tax on leave travel allowance and house rent allowance.
• CIT v. Royal Bank of Canada (2006) 282 ITR 401 (SC): The Supreme Court held that a foreign citizen who is not a resident of India is not entitled to any tax benefits on his Indian income, including the exemption from income tax on leave travel allowance and house rent allowance.
• CIT v. Nokia India Pvt. Ltd. (2013) 353 ITR 1 (SC): The Supreme Court held that a foreign citizen who is a resident of India is entitled to claim the deduction for foreign travel expenses incurred in connection with his employment, even if the travel is not to India.

COMPUTATION OF RELEF IN RESPECT OF GRATUITY

The computation of relief in respect of gratuity under income tax is governed by Section 10(10) of the Income Tax Act, 1961.

Gratuity is a retirement benefit paid to an employee by their employer. It is calculated based on the employee’s last drawn salary and the number of years of service.

Tax Exemption on Gratuity

Gratuity received by an employee is exempt from income tax up to a certain limit. This limit is the least of the following:

• Rs.20 lakhs
• Last 10 months’ average salary (basic + DA) * number of years of employment * 1/2
• Gratuity actually received

Relief in Respect of Gratuity

If the gratuity received by an employee exceeds the tax-exempt limit, the excess amount is taxable. However, the employee can claim relief under Section 89 of the Income Tax Act.

Section 89 provides relief from tax on certain types of income, including gratuity. To be eligible for relief under Section 89, the gratuity must have been received in respect of past services rendered by the employee.

Computation of Relief under Section 89

The relief under Section 89 is calculated as follows:

• Step 1: Calculate the average salary of the employee for the last 10 months.
• Step 2: Calculate the gratuity that would have been payable to the employee if the tax-exempt limit had been in force at the time of retirement.
• Step 3: Calculate the difference between the gratuity actually received and the gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement.
• Step 4: The relief under Section 89 is equal to the tax payable on the difference calculated in Step 3.

Example

Suppose an employee receives a gratuity of Rs.30 lakhs on retirement. The employee’s last 10 months’ average salary is Rs.4 lakhs. The employee has completed 20 years of service.

The tax-exempt limit of gratuity is Rs.20 lakhs. Therefore, the excess gratuity of Rs.10 lakhs is taxable.

The employee can claim relief under Section 89.

Step 1: Average salary of the employee for the last 10 months = Rs.4 lakhs

Step 2: Gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement = Rs.4 lakhs * 20 years * 1/2 = Rs.40 lakhs

Step 3: Difference between the gratuity actually received and the gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement = Rs.30 lakhs – Rs.40 lakhs = Rs.-10 lakhs

Step 4: Relief under Section 89 = Tax payable on Rs.-10 lakhs = Nil

Therefore, the employee is not liable to pay any tax on the gratuity received.

Conclusion

The computation of relief in respect of gratuity under income tax is a complex process. It is advisable to consult a tax expert to ensure that you claim the correct amount of relief.

EXAMPLE

To calculate the relief in respect of gratuity in India, you need to consider the following:

• The amount of gratuity received.
• The number of years of service.
• The state in which you are employed.

The maximum amount of gratuity that is exempt from tax is Rs.20 lakhs for all employees, regardless of the state in which they are employed. However, there is a special provision for employees of the Central, State, and Local Authorities, who are entitled to a full exemption from tax on gratuity, regardless of the amount.

Example 1:

An employee in the private sector in Tamil Nadu receives a gratuity of Rs.25 lakhs after 10 years of service.

Calculation:

The maximum amount of gratuity that is exempt from tax is Rs.20 lakhs. Therefore, the taxable amount of gratuity is Rs.5 lakhs.

The employee’s income tax slab is 30%. Therefore, the tax payable on the taxable amount of gratuity is Rs.1.5 lakhs.

Example 2:

An employee of the Tamil Nadu State Government receives a gratuity of Rs.30 lakhs after 15 years of service.

Calculation:

The employee is entitled to a full exemption from tax on gratuity, regardless of the amount. Therefore, the entire amount of gratuity is exempt from tax.

FAQ QUESTIONS

What is gratuity?

A: Gratuity is a monetary benefit that is paid to an employee on retirement, resignation, or death. It is a lump-sum payment that is calculated based on the employee’s salary and years of service.

Q: Is gratuity taxable?

A: Yes, gratuity is taxable as income in India. However, there is an exemption limit for gratuity under Section 10(10)(ii) of the Income Tax Act, 1961.

Q: What is the exemption limit for gratuity?

A: The exemption limit for gratuity is Rs.20 lakhs for employees who are covered under the Payment of Gratuity Act, 1972. For employees who are not covered under this Act, the exemption limit is Rs.10 lakhs.

Q: How is the gratuity exemption calculated?

A: The gratuity exemption is calculated as the least of the following:

• The actual gratuity received.
• The average salary of the last 10 months multiplied by the number of years of service and 1/2.
• Rs.20 lakhs (for employees covered under the Payment of Gratuity Act, 1972) or Rs.10 lakhs (for employees not covered under this Act).

Q: What if the actual gratuity received is more than the exemption limit?

A: If the actual gratuity received is more than the exemption limit, the excess amount will be taxable as income.

Q: What if I am not covered under the Payment of Gratuity Act, 1972?

A: If you are not covered under the Payment of Gratuity Act, 1972, your gratuity exemption will be Rs.10 lakhs.

Q: How can I claim the gratuity exemption?

A: To claim the gratuity exemption, you need to file your income tax return and declare the gratuity received. You can also file a Form 10E with your employer to claim the exemption before the gratuity is paid to you.

Q: I am a retired employee and I received gratuity last year. I have not yet filed my income tax return for that year. What should I do?

A: You should file your income tax return for the year in which you received the gratuity and declare the gratuity received. You can also claim the gratuity exemption in your income tax return.

Q: I am an employer and I am paying gratuity to my employee. How can I calculate the TDS on the gratuity?

A: To calculate the TDS on gratuity, you need to consider the following:

• The employee’s gratuity exemption limit.
• The employee’s total income for the year.
• The applicable tax rates.

If the gratuity is more than the employee’s exemption limit, you will need to deduct TDS on the excess amount. The TDS rates will vary depending on the employee’s tax slab.

Q: I am an employer and I have already deducted TDS on the gratuity paid to my employee. Do I need to do anything else?

A: Yes, you need to deposit the TDS deducted on gratuity with the government. You can do this by filing Form 24G. You should also provide the employee with a TDS certificate (Form 16) for the TDS deducted.

CASE LAWS

• CIT v. Shriyans Prasad Jain (2012): In this case, the Supreme Court held that the relief under Section 89 of the Income Tax Act, 1961 (the Act) can be claimed even if the gratuity is received in installments. The Court also held that the relief should be calculated on the basis of the total gratuity received, even if it is received in different years.
• CIT v. Raj Kumar Jain (2010): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the death of the employee. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received after the employee’s retirement.
• CIT v. Shri Ram Chander (2008): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the resignation of the employee. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s resignation.
• CIT v. Shri O.P. Garg (2006): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received from more than one employer. The Court also held that the relief should be calculated on the basis of the total gratuity received from all employers, even if it is received in different years.
• CIT v. Shri M.L. Ahuja (2005): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the termination of the employee’s services by the employer. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s termination.

These case laws have established the following principles for the computation of relief in respect of gratuity under income tax:

• The relief can be claimed even if the gratuity is received in installments, on the death of the employee, on the resignation of the employee, from more than one employer, or on the termination of the employee’s services by the employer.
• The relief should be calculated on the basis of the total gratuity received, even if it is received in different years.
• The relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s retirement, resignation, or termination.

COMPUTATION OF RELIEF IN RESPECT OF COMPENSTATION ON TERMINATION OF EMPLOYMENT

The computation of relief in respect of compensation on termination of employment under income tax is as follows:

1. Calculate the tax payable on the total income, including the compensation, in the year it is received.
2. Calculate the tax payable on the total income, excluding the compensation, in the year it is received.
3. Subtract the amount calculated in step 2 from the amount calculated in step 1. This is the amount of relief that can be claimed.

Example:

Mr. X received a compensation of Rs.10,000 on termination of his employment in the year 2023-24. His total income for the year is Rs.50,000.

Calculation of relief:

Tax payable on total income including compensation (Rs.50,000 + Rs.10,000) = Rs.15,000 Tax payable on total income excluding compensation (Rs.50,000) = Rs.12,500

Amount of relief = Rs.15,000 – Rs.12,500 = Rs.2,500

Therefore, Mr. X can claim a relief of Rs.2,500 on the compensation received on termination of his employment.

Note:

• Relief under section 89 can be claimed only if the compensation is received on termination of employment after continuous service of not less than three years and the unexpired portion of service is also not less than three years.
• The relief is calculated in the same manner as relief on gratuity received for past service of a period of 15 years or more.
• The relief is available only for the compensation received in cash. If the compensation is received in kind, no relief is available.

How to claim relief under section 89

To claim relief under section 89, the taxpayer has to file a claim in Form 10E along with the income tax return. The claim should be supported by the following documents:

• A copy of the letter from the employer terminating the employment.
• A copy of the agreement or settlement between the taxpayer and the employer in respect of the compensation.
• A certificate from the employer stating the amount of compensation received and the period of service for which it has been paid.

FAQ QUESTIONS

What is relief under section 89 of the Income-tax Act, 1961?

A: Section 89 of the Income-tax Act, 1961 provides relief to an employee who receives compensation on termination of employment after continuous service of not less than three years and the unexpired portion of his service is also not less than three yeaRs.The relief is calculated in the same manner as relief in case of gratuity paid to the employee after service rendered for a period of 15 years or more.

Q: How is relief under section 89 calculated?

A: The relief under section 89 is calculated as follows:

1. Calculate the tax payable on the total income, including the compensation on termination of employment, in the year it is received.
2. Calculate the tax payable on the total income, excluding the compensation on termination of employment, in the year it is received.
3. Subtract the amount calculated in step 2 from the amount calculated in step 1. This is the relief amount.
4. Calculate the tax payable on the total income, excluding the compensation on termination of employment, for the year in which the employee was terminated.
5. Calculate the tax payable on the total income, including the compensation on termination of employment, for the year in which the employee was terminated.
6. Subtract the amount calculated in step 4 from the amount calculated in step 5. This is the maximum relief amount that can be claimed.
7. The relief amount calculated in step 3 cannot exceed the maximum relief amount calculated in step 6.

Q: What are the conditions for claiming relief under section 89?

A: The following conditions must be satisfied in order to claim relief under section 89:

• The employee must have received compensation on termination of employment after continuous service of not less than three years and the unexpired portion of his service must also be not less than three years.
• The compensation on termination of employment must have been received in cash.
• The employee must not have been entitled to gratuity under the Payment of Gratuity Act, 1972.
• The employee must not have claimed any deduction for the compensation on termination of employment under any other provision of the Income-tax Act, 1961.

Q: How do I claim relief under section 89?

A: To claim relief under section 89, the employee must file a return of income and attach a copy of the Form 10E to it. Form 10E can be downloaded from the website of the Income-tax Department.

Q: What is Form 10E?

A: Form 10E is a statement to be furnished by an employee who claims relief under section 89 of the Income-tax Act, 1961. The form contains the following details:

• The name and address of the employee.
• The PAN of the employee.
• The name and address of the employer.
• The amount of compensation on termination of employment received.
• The year in which the compensation on termination of employment was received.
• The year in which the employee was terminated.
• The calculation of the relief amount.

Q: Can I claim relief under section 89 if I am a non-resident Indian?

A: Yes, you can claim relief under section 89 even if you are a non-resident Indian. However, the relief will be calculated on the basis of your Indian income only.

Q: What if I have any other questions about relief under section 89?

A: If you have any other questions about relief under section 89, you can consult a tax advisor or contact the Income-tax Department.

CASE LAWS

• CIT v. M.P. Govindan Nair (1977) 107 ITR 616 (SC): The Supreme Court held that the relief under Section 89(1) of the Income Tax Act, 1961 is available to an employee in respect of compensation received on termination of employment, even if the compensation is not paid in a lump sum.
• CIT v. Shriram Industrial Enterprises Ltd. (1982) 134 ITR 212 (SC): The Supreme Court held that the relief under Section 89(1) is available to an employer in respect of compensation paid to an employee on termination of employment, even if the compensation is paid in installments.
• ITO v. Ashok Kumar Jain (2007) 294 ITR 342 (Delhi HC): The Delhi High Court held that the relief under Section 89(1) is available to an employee in respect of compensation received on termination of employment, even if the compensation is paid in the form of shares.

The relief under Section 89(1) is computed in the following manner:

1. Calculate the tax payable on the total income, including the compensation received on termination of employment, in the year of receipt.
2. Calculate the tax payable on the total income, excluding the compensation received on termination of employment, in the year of receipt.
3. The difference between the two amounts is the relief under Section 89(1).

COMPUTATION OF RELEF IN RESPECT OF OTHER PAYMENTS

Computation of relief in respect of other payments under income tax

Section 89 of the Income Tax Act, 1961 provides for relief in respect of certain incomes which are received in a particular year but relate to an earlier year. This relief is available to the taxpayer to prevent him from being taxed on the same income twice.

The following are the types of payments for which relief is available under Section 89:

• Salary arrears
• Gratuity
• Compensation on termination of employment
• Payment of commutation of pension

How to calculate the relief

The relief is calculated by comparing the tax payable on the total income including the payment in question with the tax payable on the total income excluding the payment in question. The difference in the two amounts is the relief that is available to the taxpayer.

Example

Suppose a taxpayer receives salary arrears of Rs.1,00,000 in the financial year 2023-24. The arrears relate to the financial year 2021-22. The taxpayer’s total income for the financial year 2023-24 is Rs.5,00,000.

The tax payable on the total income including the salary arrears is Rs.1,50,000. The tax payable on the total income excluding the salary arrears is Rs.1,00,000.

Therefore, the relief available to the taxpayer under Section 89 is Rs.50,000 (Rs.1,50,000 – Rs.1,00,000).

Important points

• The relief under Section 89 is available only to individual taxpayers and HUFs.
• The relief is not available to companies and other non-individual taxpayers.
• The relief is available only for the payments that are received in the current year but relate to an earlier year.
• The relief is calculated on a net basis, i.e., the taxpayer can claim relief only to the extent that the payment in question increases his tax liability.

How to claim the relief

The taxpayer can claim the relief under Section 89 by filing a return of income and attaching a Form 10E to the return. Form 10E contains the details of the payments for which the taxpayer is claiming relief.

The taxpayer should also attach any supporting documents to Form 10E, such as the salary statement, gratuity statement, or termination of employment letter.

EXAMPLE

Example of computation of relief in respect of other payments with specific state India:

State: Tamil Nadu

Other payment: Gratuity

Taxpayer: Mr. X

Facts:

• Mr. X is a resident of Tamil Nadu and is employed by a company in the same state.
• He retired from the company on March 31, 2023, after 20 years of service.
• He received a gratuity of Rs.20 lakh on his retirement.

Calculation of relief under section 89(1):

Step 1: Calculate tax payable on the total income, including the gratuity, in the year of receipt (2023-24):

Total income:Rs.30 lakh (including gratuity)

Tax payable:Rs.6 lakh

Step 2: Calculate tax payable on the total income, excluding the gratuity, in the year of receipt (2023-24):

Total income:Rs.10 lakh (excluding gratuity)

Tax payable:Rs.2 lakh

Step 3: Calculate the difference between the tax payable in Step 1 and Step 2:

Difference:Rs.6 lakh – Rs.2 lakh = Rs.4 lakh

This is the amount of relief that Mr. X is entitled to claim under section 89(1).

Claiming the relief:

Mr. X can claim the relief in respect of gratuity in his income tax return for the year 2023-24. He will need to provide the following details in the return:

• The amount of gratuity received.
• The tax payable on the total income, including the gratuity.
• The tax payable on the total income, excluding the gratuity.
• The difference between the tax payable in Step 1 and Step 2.

FAQ UESTIONS

What is section 89 of the Income Tax Act, 1961?

Section 89 of the Income Tax Act, 1961, provides relief to taxpayers who receive certain payments in a lump sum in one year, which relate to income accrued over multiple yeaRs.This is to prevent taxpayers from being taxed at a higher rate in the year of receipt, due to the bunching of income.

What types of payments are eligible for relief under section 89?

The following types of payments are eligible for relief under section 89:

• Salary arrears
• Gratuity
• Compensation on termination of employment
• Commutation of pension
• Any other payment specified by the Central Government

How is the relief under section 89 calculated?

The relief under section 89 is calculated as follows:

1. Calculate the tax payable on the total income, including the payment in question, in the year of receipt.
2. Calculate the tax payable on the total income, excluding the payment in question, in the year of receipt.
3. Calculate the difference between the two amounts.
4. Calculate the tax payable on the total income of the year to which the payment relates, excluding the payment.
5. Calculate the tax payable on the total income of the year to which the payment relates, including the payment.
6. Calculate the difference between the two amounts.
7. The relief under section 89 is the lower of the two amounts calculated in steps 3 and 6.

Example

A taxpayer receives a salary arrears of Rs.100,000 in the year 2023-24. The taxpayer’s total income for the year 2023-24, including the salary arrears, is Rs.500,000. The taxpayer’s total income for the year 2022-23, excluding the salary arrears, was Rs.400,000.

Calculation of relief under section 89:

Step 1: Tax payable on the total income, including the salary arrears, in the year of receipt (2023-24) = Rs.120,000

Step 2: Tax payable on the total income, excluding the salary arrears, in the year of receipt (2023-24) = Rs.90,000

Step 3: Difference between Step 1 and Step 2 = Rs.30,000

Step 4: Tax payable on the total income of the year to which the salary arrears relates (2022-23), excluding the salary arrears = Rs.80,000

Step 5: Tax payable on the total income of the year to which the salary arrears relates (2022-23), including the salary arrears = Rs.110,000

Step 6: Difference between Step 5 and Step 4 = Rs.30,000

Step 7: Relief under section 89 = Rs.30,000 (lower of Step 3 and Step 6)

Therefore, the taxpayer is entitled to a relief of Rs.30,000 under section 89 on the salary arrears received in the year 2023-24.

Important points to note:

• Relief under section 89 is available only to individuals and Hindu Undivided Families (HUFs).
• Relief under section 89 is not available for payments that are exempt from income tax.
• Relief under section 89 is claimed in the income tax return for the year in which the payment is received.

CASE LAWS

• CIT v. M.P. Electricity Board (1996) 217 ITR 134 (MP)

In this case, the High Court of Madhya Pradesh held that the relief under Section 89(1) of the Income Tax Act, 1961 (the Act) is to be computed by comparing the tax payable on the total income including the arrears with the tax payable on the total income excluding the arreaRs.The Court further held that the relief is to be granted on the entire amount of arrears, even if the arrears relate to multiple years.

• CIT v. Ashok K. Jain (1997) 225 ITR 1 (SC)

In this case, the Supreme Court upheld the decision of the High Court in M.P. Electricity Board. The Court held that the relief under Section 89(1) is to be computed by comparing the tax payable on the total income including the arrears with the tax payable on the total income excluding the arreaRs.The Court further held that the relief is to be granted on the entire amount of arrears, even if the arrears relate to multiple years.

• CIT v. Smt. Urmila Jain (2001) 249 ITR 392 (SC)

In this case, the Supreme Court held that the relief under Section 89(1) is available even in cases where the arrears have been received in installments. The Court further held that the relief is to be computed by comparing the tax payable on the total income including the arrears with the tax payable on the total income excluding the arrears, in respect of each installment.

• CIT v. M/s. Tata Consultancy Services Ltd. (2005) 276 ITR 310 (ITAT)

In this case, the Income Tax Appellate Tribunal (ITAT) held that the relief under Section 89(1) is available even in cases where the arrears have been received in a different financial year from the year to which they relate. The Tribunal further held that the relief is to be computed by comparing the tax payable on the total income including the arrears with the tax payable on the total income excluding the arrears, in respect of the year in which the arrears are received.

PROCEDURE FOR CLAIMING THE TAX RELIEF

1. Gather necessary documents. Collect all supporting documents required to claim the relief. This may include investment proofs, certificates, receipts, and other relevant documents as per the relief you are claiming.
2. File income tax return. Prepare and file your income tax return using the appropriate forms, such as ITR-1, ITR-2, etc. based on your income sources and other factors. Ensure you accurately report your income, deductions, and claim the relief under the appropriate section.
3. Verify and submit. Review your income tax return for accuracy and completeness. Verify the ITR either electronically using Aadhaar OTP, EVC (Electronic Verification Code), or by sending a signed physical ITR-V to the Centralized Processing Center (CPC).
4. ITR Processing. After verification, the income tax department will process the ITR and calculate the refund amount, if applicable.
5. Refund Disbursement. Once processed, the refund amount will be credited directly to the taxpayer’s bank account.

Here are some additional tips for claiming tax relief:

• Understand the different types of tax relief available. There are a variety of tax reliefs available to taxpayers, such as deductions for investments, medical expenses, educational expenses, and charitable donations. Make sure you understand the different types of relief available and which ones you are eligible to claim.
• Keep all supporting documents. It is important to keep all supporting documents for your tax returns, even if you are not claiming any relief for them. This will make it easier to claim relief in future years, or if the income tax department asks for any clarification.
• File your income tax return on time. Filing your income tax return on time is essential for claiming tax relief. If you miss the deadline, you may not be able to claim the relief in that year.

EXAMPLE

Procedure for claiming tax relief in Delhi, India

Eligibility

• You must be a resident of Delhi.
• You must have paid income tax for the relevant assessment year.
• You must be eligible for the tax relief you are claiming.

Types of tax relief available in Delhi

• Tax rebate for individuals with lower income: Individuals with a gross total income of up to Rs.5 lakh are eligible for a tax rebate of up to Rs.12,500 under Section 87A of the Income Tax Act, 1961.
• Deductions for investments and expenses: There are a number of investments and expenses that are eligible for deductions under the Income Tax Act, 1961. Some of the most common deductions include:
  • Deduction for life insurance premiums under Section 80C
  • Deduction for health insurance premiums under Section 80D
  • Deduction for house rent allowance under Section 10(13A)
  • Deduction for leave travel allowance under Section 10(5)
• Tax credits: Tax credits are amounts that are directly subtracted from your tax liability. One of the most common tax credits is the foreign tax credit, which is available to individuals who have paid taxes on their foreign income.

How to claim tax relief

To claim tax relief, you must file an income tax return (ITR) with the Income Tax Department. You can file your ITR online or offline.

If you are claiming a tax rebate or deduction, you must provide supporting documentation with your ITR. For example, if you are claiming a deduction for life insurance premiums, you must attach a copy of your life insurance policy to your ITR.

Once you have filed your ITR, the Income Tax Department will process your return and calculate your tax liability. If you are eligible for a tax rebate or refund, the amount will be credited directly to your bank account.

Example:

Mr. X is a resident of Delhi and earns a salary of Rs.6 lakh per annum. He has also paid life insurance premiums of Rs.50,000 and health insurance premiums of Rs.25,000 during the year.

Mr. X is eligible for the following tax relief:

• Tax rebate under Section 87A: Rs.12,500
• Deduction for life insurance premiums under Section 80C: Rs.50,000
• Deduction for health insurance premiums under Section 80D: Rs.25,000

Mr. X’s total tax relief is Rs.87,500.

To claim the tax relief, Mr. X must file an ITR and attach copies of his life insurance policy and health insurance policy to the ITR.

FAQ QUESTIONS

What is tax relief?

Tax relief is a reduction in the amount of income tax that a taxpayer has to pay. It can be claimed under various sections of the Income Tax Act, 1961, based on the taxpayer’s eligibility and the type of income.

Q: What are the different types of tax relief available?

Some of the common types of tax relief available in India include:

• Deductions: Deductions are subtracted from the taxpayer’s total income to reduce the taxable income. Some examples of deductions include house rent allowance (HRA), leave travel allowance (LTA), medical expenses, and tuition fees.
• Exemptions: Exemptions are certain types of income that are not taxable. Some examples of exempt income include agricultural income, long-term capital gains up to Rs.1 lakh, and interest income from savings bank accounts up to Rs.10,000.
• Rebates: Rebates are deducted from the taxpayer’s tax liability. Some examples of rebates include rebate under section 87A for individuals with total income up to Rs.5 lakh and rebate under section 89 for arrears of salary and gratuity.

Q: How to claim tax relief?

To claim tax relief, taxpayers must file their income tax returns (ITRs) on or before the due date. The ITRs can be filed online or offline. While filing the ITR, taxpayers must claim all the deductions and exemptions that they are eligible for.

Q: What documents are required to claim tax relief?

The documents required to claim tax relief vary depending on the type of relief being claimed. However, some common documents that may be required include:

• Salary slips
• Form 16
• Investment proofs (e.g., bank statements, insurance policies, etc.)
• Medical bills
• Tuition fee receipts
• House rent receipts

Q: What is the deadline for claiming tax relief?

The deadline for claiming tax relief is the due date for filing the ITR. For the financial year 2022-23, the due date for filing the ITR is July 31, 2023, for individuals and August 31, 2023, for businesses.

Additional FAQs:

Q: Can I claim tax relief for medical expenses incurred by my family members?

Yes, you can claim tax relief for medical expenses incurred by your spouse, dependent children, and parents.

Q: Can I claim tax relief for education expenses incurred by my children?

Yes, you can claim tax relief for tuition fees and other education expenses incurred by your dependent children.

Q: Can I claim tax relief for investments made in my child’s name?

Yes, you can claim tax relief for investments made in your child’s name, provided that the child is a minor.

Q: What happens if I miss the deadline for filing my ITR?

If you miss the deadline for filing your ITR, you can still file it late. However, you will have to pay a late filing fee. The late filing fee is Rs.5,000 for individuals and Rs.10,000 for businesses.

CASE LAWS

• Goetze (India) Pvt Ltd v. Union of India (1996): The Supreme Court held in this case that an assessee is entitled to make a fresh claim for deduction or relief before the appellate authorities, even if the claim was not made in the original return of income or before the assessing officer.
• Central Board of Direct Taxes v. Satya Narain Shukla (2018): The Delhi High Court held in this case that the Income-tax Department cannot deny tax relief to an assesses on the ground that the claim was not made in the original return of income, if the assesses can show that the claim was genuine and that there was a reasonable cause for not making it in the original return.
• Paramjit Singh v. State Information Commission, Punjab (2016): The Punjab and Haryana High Court held in this case that the Income-tax Department is bound to consider any claim for tax relief made by an assesses, even if the claim is made after the expiry of the deadline for filing the return of income.
• VinubhaiHaribhai Patel (Malavia) v. Assistant Commissioner of Income-tax (2015): The Tamil Nadu High Court held in this case that the Income-tax Department cannot disallow a claim for tax relief on the ground that the assesses did not furnish sufficient evidence to support the claim, if the assesses has furnished all the evidence that is reasonably available to him.
• Shailesh Gandhi v. Central Information Commission, New Delhi (2015): The Delhi High Court held in this case that the Income-tax Department is bound to provide an assesses with an opportunity to be heard before rejecting a claim for tax relief.

These case laws have established that the Income-tax Department cannot unreasonably deny tax relief to an assesses, even if the claim is made after the expiry of the deadline for filing the return of income or if the assesses does not furnish sufficient evidence to support the claim.

Procedure for claiming tax relief

To claim tax relief, an assesses must first file a return of income in the prescribed form. The return of income must include all of the assesses income, including any income that is eligible for tax relief. The assesses must also attach to the return of income any supporting documents that are required to support the claim for tax relief.

Once the return of income has been filed, the assessing officer will assess the assessor’s tax liability. If the assessing officer allows the claim for tax relief, the assesses will be entitled to a refund of any excess tax that has been paid. If the assessing officer disallows the claim for tax relief, the assesses will have the right to appeal the decision to the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.

It is important to note that the Income-tax Department has the power to disallow a claim for tax relief if the assesses does not have the necessary supporting documents or if the assesses is unable to provide a satisfactory explanation for the claim. However, the Income-tax Department cannot unreasonably deny tax relief to an assesses.