Income Tax

RELIEF ON SALARY ARREARS OR ADVANCE, GRATUITY, PENSION & FAMILY PENSION

RELIEF ON SALARY ARREARS OR ADVANCE, GRATUITY, PENSION & FAMILY PENSION

Salary in arrears/advance, received in lump-sum, is liable to tax in the year of receipt (unless it has already been subjected to tax earlier). Some relief is, however, allowed from tax on such receipts. Relief is also available in respect of gratuity for past services of not less than five years; leave encashment, compensation on termination of service, payment in commutation of pension, family pension, etc. In certain cases the relief is available at source. Claiming of relief is optional and should be claimed only when it is advantageous to the claimant. The computation of amount of Tax Relief is explained as below.

ARREARS/ ADVANCE OF SALARY OR FAMILY PENSION [RULE 21A (2)]

  1. The first step is to calculate the tax on total income of the previous year in which additional salary (i.e. salary in arrears or in advance) is received.
  2. Now, calculate the tax on total income as reduced by additional salary of the previous year.
  3. From the amount arrived at Step (1), deduct the amount arrived at Step (2), to arrive at tax no additional salary.
  4. Ascertain the previous years to which the additional salary relates and add the respective amount of additional salary to total income of such previous years.
  5. Calculate the tax on total income as increased by the relevant additional salary in respect of each of such previous years.
  6. Calculate the tax on the total income (without the additional salary) of each of the said previous years.
  7. From the amount arrived at Step (5), deduct the amount arrived at Step (6), to calculate aggregate tax on additional salary.
  8. The relief under section 89(1) is the difference of (3) and (7).

 GRATUITY [RULE 21A (3)]

  1. Where gratuity is paid to an employee for past services of less than 5 years no relief shall be admissible.
  2. Where gratuity is paid for past services of more than 5 years but less than 15 years, the amount of relief shall be calculated as under:
  • Calculate income-tax on total income (including taxable gratuity) for the previous year in which gratuity is received.
  • Calculate average rate of tax;
  • Calculate tax on taxable gratuity at the average rate add one portion in (2) above;
  • Divide the taxable gratuity into equal parts and add one portion each to the total income of the preceding years;
  • Calculate average rate of tax for each of such preceding years;
  • Calculate average of the average rates;
  • Calculate tax on taxable gratuity at such average of the average rates calculated in (6) above.
  • Amount of Relief = Tax on gratuity as in (3) above – Tax on gratuity as in (7) above.

  3. Where gratuity is paid for past services of 15 or more years, the taxable gratuity shall be apportioned in 3 equal parts and added to the income of the three preceding years, while calculating the amount of relief, in the manner described in (b) above.

COMPENSATION ON TERMINATION OF EMPLOYMENT [RULE 21A (4)]

Where the payment of compensation is received by an assesses from his employer of former employer at or in connection with the termination of his employment after continuous service for not less than three years and where the unexpired portion of his term of employment is also not less than three years. The method for calculating the relief is the same as in case of gratuity received for services of 15 years or more.

COMMUTATION OF PENSION [RULE 21A (5)]

The relief is compound in the same manner as if the gratuity were paid to the employee in respect of services rendered for a period of 15 years or more.

Government and public sector employees can claim the relief at source from the employer by furnishing the particulars in the prescribed Form 10E.  [Rule 21AA]

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