If an individual receives any portion of his salary in arrears or in advance, or receives profit in lieu of salary, or has received salary in any financial year for more than twelve months, then he can claim relief u/s 89(1) as the income will be assessed at a higher rate than it otherwise would have been assessed. Relief is provided in the following cases mentioned below:

• In respect of gratuity,
• In respect of compensation or termination of employment,
• In respect of commutation of employment,
• In respect of salary received in advance or arrears, In respect of family pension received in arrears or in advance.
• In respect of other payments

Here are the above mentioned cases in details:

In respect of gratuity:

A Relief can be claimed u/s 89(1) if gratuity is received in excess of limits specified. The cases in which the relief is admissible is divided into three categories:

a)      Where the payment of taxable gratuity to an employee of past services is less than 5 years:   No relief is admissible in such case.

b)      Where the payment of taxable gratuity to an employee of past services of 5 years or more but not less than 15 years: The relief is computed as follows  –

• The average rate of tax on the total income (including the gratuity in the year of receipt) & tax on gratuity is calculated.
• The average of the rates of the preceding two years is computed by adding one-half of the gratuity to the other income of each of the preceding two years.
• The difference between the taxes on gratuity computed at above will be claimed as relief u/s 89(1).
  

c)      Where the payment of taxable gratuity to an employee of past services of 15 years or more: The relief is computed as follows-

• The average rate of tax on the total income (including the gratuity in the year of receipt) & tax on gratuity is calculated.
• The average of the rates of the preceding three years is computed by adding one-third of the gratuity to the other income of each of the preceding three years.
• The difference between the taxes on gratuity computed at above will be claimed as relief u/s 89(1).

In respect of compensation or termination of employment:

If compensation is received by the assessee from his employer or former employer in connection with termination of his employment after continuous service for less than 3 years, the relief is calculated in the same manner as if gratuity payable for a period of 15 years or more.

Compensation received at the time of voluntary retirement from the service would be regarded as salary and relief u/s 89(1) would be admissible in respect of said amount, provided deduction u/s 10(10C) has not been claimed by the assessee.

In respect of commutation of employment:

A relief can be claimed in respect of payment in commutation of employment, (say pension) in excess of limits specified. Such computation is in the same manner as if gratuity was received by the employee for a period of 15 years or more.

In respect of family pension or salary received in arrears or in advance:

The relief on above is computed as follows:

1. The tax payable on the total income including the additional salary of the relevant previous year in which the same is received is calculated.
2. The tax payable on the total income excluding the additional salary of the relevant previous year in which the same is received is calculated.
3. The tax difference between (1) & (2) is calculated.
4. The tax on the total income after excluding the additional salary in the previous year to which such salary relates is calculated.
5. The tax on the total income after including the additional salary in the previous year to which such salary relates is calculated.
6. The difference between the tax at (4) & (5) is computed.
7. The excess of tax computed at (3) over the tax computed at (6) is the required amount of relief admissible under section 89(1).

• No relief is however admissible if tax computed at (3) is less than the tax computed at (6).

In respect of other payments:

A relief will be granted by the Board in such case, after examining the circumstances of each individual case.