Section 89 of Income Tax Act (Comprehensive Guide)

Section 89 of Income Tax Act allows taxpayers to claim relief in the current assessment year for any additional income received by them as a part of the salary, for the past years of service. 

Whenever the taxpayer receives any extra income, their total taxable income for that year is increased. Sometimes this pushes them into a higher tax slab, making them liable to pay more tax.

To counter this, section 89 was introduced in the Income Tax Act. The taxpayer can notify the Assessing Officer of their extra income by filing form 10 E and claim relief under this section.  

Thus, section 89 provides relief when salary, etc is paid in arrears or in advance. However, the relief is not applicable in case of the salary received in advance at the time of voluntary retirement or termination of his service. 

Section 89 says that “Where an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance or is in receipt, in any one financial year, of salary for more than twelve months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary, or is in receipt of a sum in the nature of family pension as defined in the Explanation to clause (iia) of section 57, being paid in arrears, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, the Assessing Officer shall, on an application made to him in this behalf, grant such relief as may be prescribed72”.

What Falls under Tax Relief under Section 89 of IT Act

The following types of income received can be claimed for tax relief under section 89:

1. As per Rule 21A(2), any salary received in arrears.
2. As per Rule 21A(3), any Gratuity received for past years of services(between 5 to 15 years).
3. As per Rule 21A(3), any Gratuity received for past years of services(more than 15 years).
4. As per Rule 21A(4), Compensation on termination of service.
5. As per Rule 21A(5), payment of commutation of pension.

Calculate Relief under Section 89

To calculate relief under section 89 you must calculate the total income earned in a financial year for which you received an advance salary or arrear or gratuity etc. 

You can simply use this tool given on the website of the Income Tax Department to calculate the relief amount under section 89 if any. Just click here:  

How Do You Calculate Relief under Section 89 with an Example?

Now let’s understand the calculation under section 89 with the help of an example.

1. Calculate the tax liability for the present year with the arrears added to your total income.
2. Then, calculate the tax liability for the present year without including the arrear in your total income.
3. Now, subtract the tax liability of step 2 from step 1.
4. Repeat the above steps 1,2 and 3 to calculate the tax liability for the years you have received arrears.
5. Now, you have the difference in tax payable for the years including arrears, and the years without including arrears in your total income.
6. To calculate the tax relief under section 89, subtract the two from each other.

Suppose you have received arrears of INR 3 lakh in the years 2019-2020. Total income was INR 6 lakh for that year. Your annual total income is INR 15 lakh for the fiscal year 2020-2021.

The steps to calculate the relief amount under section 89 is been simplified, using tables. Scroll below for a better understanding.

Calculation of tax liability for the fiscal year 2020-21:

Calculation of tax liability for the fiscal year 2019-20:

The relief under section 89 will be; INR 93,600 – INR 62,400 = INR 31,200.

What Is Relief U/S 89 Form 10E?

Form 10 E is used in case of claiming relief under section 89 of the IT Act. If the assessee has received any advance or arrears of any sum in form of salary for a period of more than 12 months. His tax liability for that year increases. To claim relief or get an exemption from paying additional taxes, he can file form 10 E, before filing the income tax return.

Some important points to remember about Form 10 E

1. Form 10 E is absolutely mandatory to file for claiming relief u/s 89.
2. Form 10 E can be filed online after logging in to the government’s e-filing portal.
3. There is no need to download it and send it.
4. Form 10 E must be filed before filing ITR to claim the relief benefits.
5. If you did not file 10E before filing ITR and claimed a deduction under section 89 in the ITR. The ITR will be processed, but you will receive any benefit of section 89.
6. If your claimed relief was not approved by the IT department, you will be informed through an intimation under section 143(1) after your ITR processing is done.

How Do I Fill Out Section 89 in ITR?

You can claim deductions under section 89 in the ITR through form 16 for salaried individuals. You can find this section just before the Net tax payable amount. But, before that, you must file Form 10 E. After that only your claim to get relief under 89 will be allowed by the Assessing Officer. 

Here is the link to download form 16. 

Documents to Keep In Hand While Filing Form 10 E

You will need the previous year’s returns relevant to the annual year in which arrear/advance/gratuity/compensation/pension falls. In case you missed filing ITR for the previous years, you can use the Salary slip of previous years to show the income.

FAQ: Section 89 of Income Tax Act

1. What is the amount of relief under section 89?

The amount of relief under section 89 is the total difference in the tax liability between the years the arrears were paid and the years for which they were paid.

The relief under section 89 can be claimed only by filling the form 10 E. This can be done online.

2. How do I claim relief under section 89 for leave encashment?

Leave encashment is also a part of the salary which can be claimed under section 89.

3. Can we claim 89 relief in new tax regime?

Yes, you can claim relief under section 89 even if you follow the new tax regime to file your taxes.

Conclusion

Section 89 of Income Tax Act allows taxpayers to get relief from paying extra taxes for any advance income/pension/compensation/etc received as part of their salary. It can be claimed by filing form 10 E through the official e-filing portal of the Income Tax Department. The form is mandatory to be filed by the taxpayer to claim relief under this section. 

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