What is the meaning of relief under section 89(1)?

Tax is calculated on your total income earned or received during the year. If your total income includes any past dues paid in the current year i.e., arrears of salary or advance salary or arrears of family pension, you may be worried about paying a higher tax on such arrears as the tax slab rate of past years has less income tax rate as compared to current financial year.

To reduce the additional tax burden due to delay in receiving such income, relief under section 89(1) is provided.

How to calculate relief for the AY 2019-2020 (FY 2018-2019)?

Relief can be calculate by following the below steps :

S1Calculate tax payable of the previous year in which the  arrears/advance salary is received by considering:
(a)Total Income inclusive of additional salary  
(b)Total Income exclusive of additional salary.
S2  Compute the difference of the tax calculated in Step 1 i.e.,(a) – (b)
S3  Calculate the tax payable of every previous year to which the additional salary relates:
(a)On total income including additional salary of that particular previous year.  
(b)On total income excluding additional salary.
S4   Calculate the difference between (a) and (b) in Step 3 for every previous year to which the additional salary relates and aggregate the same.
S5Relief under section 89(1) = Amount calculated in Step 2 – Amount calculated in Step 4

Let’s take an example :

Mr. A aged 64 years total income of Rs. 10,20,000/- for Financial Year 2018-2019 (Assessment Year 2019-2020) and received arrears of Rs. 1,03,000/- for Financial Year 2010-11 (Assessment Year 2011-12). The total income for Financial Year 2010-11 is Rs 7,10,000.

Assessment Year Slab rates of income-tax  
  For resident individuals of the age of 60 years or more at any time during the previous year   For other resident individuals
  Slabs Rate Slabs Rate
2011–12 Upto  Rs 2,40,000 Nil Upto Rs 1,60,000 Nil
  Rs 2,40,001 – Rs 5,00,000 10% Rs  1,60,001 – Rs 5,00,000 10%
  Rs 5,00,001 – Rs 8,00,000 20% Rs  5,00,001 –  Rs 8,00,000 20%
  Above Rs 8,00,000 30% Above  Rs 8,00,000 30%

Education cess@2% and secondary and higher education cess@1%

S1: Computation of tax payable by Mr. A for the A.Y.2019-20

Particulars Including arrears of salary Excluding arrears of salary
Current year salary 10,20,000 10,20,000
Add: Arrears of salary 1,03,000
Taxable Salary 11,23,000 10,20,000
Income-tax thereon 1,46,900 1,16,000
Add : Health and education cess @4% 5,876 4,640
Total payable 1,52,776 1,20,640

S2:  Difference of S1

Particulars Amount (rs)
Tax payable in A.Y.2019-20 on arrears:
Tax on income including arrears (a) 1,52,776
Less : Tax on income excluding arrears(b) (1,20,640)
Total 32,136

S3: Computation of tax payable on arrears of salary for A.Y.2011-12

Particulars   Including. arrears (Rs) Excluding. arrears (Rs)
Taxable salary 7,10,000 7,10,000
Add: Arrears of salary 1,03,000
Taxable salary 8,13,000 7,10,000
Tax on the above 97,900 76,000
Add: Cess@3% 2,937 2,280
Tax payable 1,00,837 78,280

S4: Difference of S3

Particulars Amount (rs)
Tax payable in A.Y.2011-12
Tax on income including arrears (a) 1,00,837
Less: Tax on income excluding arrears (b) (78,280)
Total 22,557

S5: Tax payable for A.Y.2019-20 after relief under section 89

Particulars Amount (rs)
Income-tax payable on total income including arrears of salary 1,52,776
Less : Relief under section 89 S2 – S4 i.e., (32,136 – 22,557) 9,579
Tax payable after claiming relief 1,43,197