When an employee receives salary for more than 12 month in any one financial years due to being paid in arrears or in advance. Due to excess salary he assessed at higher rate than that at which it would otherwise has been assessed, then he can claim relief u/s 89. Basic points are as under:
1. When employee receives salary in arrears in the previous year.
2. When employee receives salary in advance.
3. When employee receives compensations in connection with termination of employment.
Step 1 : Calculate tax for the current year on income including arrear salary /advance salary/ compensations.
Step 2 : Calculate tax for the current year on income excluding salary in arrears/advance/ compensations.
Step 3 : Step1 – step2
Step 4 : Calculate tax for the year in which salary/compensation ought have been received on income including salary in arrears/advance/ compensations.
Step 5 : Calculate tax for the year in which salary/compensation ought have been received on income excluding arrears/advance/ compensations.
Step 6 : Step4 – Step5
Step 7 : Relief u/s 89 = Step3-step6 (if positive, otherwise nil)
Step 8 : Tax need to be paid for Current Assessment year = Step1-step7
Note: Tax should be calculated inclusive of cees and education cess
Rule – 21AA : Where the assessee as an employee is entitled to relief under sub-section (1) of section 89 (1) he may furnish , the specified details in Form No 10 E, to the person responsible for making the payment u/s 192(1).