If salary is received in arrears or in advance, or receives profit in lieu of salary, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1). The relief is also available on family pension received in arrears.
How to compute Relief U/s 89
1.Calculate the tax payable on the total income, including the additional salary of the relevant previous year in which the same is received.
2. Calculate the tax payable on the total income, excluding the additional salary of the relevant previous year in which the same is received.
3. Find out the difference in tax at (1) and (2) above.
4. Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates.
5. Compute the tax on the total income after including the additional salary in the previous year to which such salary relates.
6. Find out the difference in tax at (4) and (5) 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.
five different situations wherein the assessee will be entitled to relief:
a. salary being received in arrears or advance,
b. 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,
c. where the payment is in the nature of compensation received by the employee from his employer or former employer at or 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,
d. where the payment is in the nature of commutation of pension,
e. where the payment is not covered by the description given in (a) to (d) above.