REBATES AND RELIEFS OF INCOME-TAX

REBATES AND RELIEFS OF INCOME-TAXRebate to be allowed in computing income-tax [Section 87]:

In case of certain assessees, while computing the amount of income-tax on total income, deduction under section 88 E shall be allowed from the income-tax so computed before allowing the deductions under this chapter. However, such deductions under section 88 E shall not, in any case exceed the amount of tax computed on Total Income before allowing such deduction.

Rebate in respect of securities transaction tax [Section 88E]:

Rebate under section 88 E is applicable from the assessment year 2005-06.

The following conditions should be satisfied

1) The taxpayer is an individual, HUF, firm or any other person.

2) His income includes any income chargeable under the head Profits and gains of business or profession arising from taxable securities transactions.

3) The assessee furnishes along with the return of income evidence of payment of securities transaction tax in Form No.10DB (in the case of transaction in stock exchange) and Form No.10DC (in case of transfer of units of Mutual Fund).

Where total income of an assessee in a previous year includes any income, chargeable under the head Profits and gains of business or profession, arising from taxable securities transactions, he shall be entitled to a deduction, from the amount of income-tax on such income arising from such transactions, to the extent of the minimum of the following two amounts

(1) securities transaction tax paid by the assessee in respect of taxable securities transaction entered into in the course of his business during that previous year;

(2) Average rate of income-tax x business income from such taxable securities transactionsAverage rate of Income-tax = Total tax x 100

Total income

The rebate under section 88E shall be allowed even though the income from taxable securities transaction is of speculative nature.

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Relief of income-tax [Sections 86, 110 and 89(1)]:

(a) Relief in respect of share of profit from an association of persons or body of individuals [Section 86]:

Where the association of persons or body of individuals is chargeable to tax at the normal rates of tax applicable to individuals, then the share of a member of such AOP/BOI shall be included in the taxable income of the member, such member shall, however, be entitled to a relief in his Total Income but on which tax has already been paid by the AOP/BOI. As per section 110, the relief shall be allowed at the average rate of tax calculated on the total income inclusive of such income.

Relief under section 86 shall not be applicable:

(i) Where the AOP or BOI is chargeable to tax on its total income at the maximum marginal rate or any higher rate under any provisions of the Income-tax Act.

(ii) Where no income-tax is chargeable on the total income of the AOP or BOI as in that case, the share of a member computed shall be chargeable to tax as part of his total income.

(b) Relief when salary, etc., is paid as arrears or in advance or payment in lump sum [Section 89(1)]:

Where an assessee is in receipt of salary for more than 12 months during any financial year or any payment which is a profit in lieu of salary or is in receipt of arrears of family pension, his income will be assessed at a rate higher than that at which it would otherwise have been assessed. In such case, the assessee is provided relief under section 89(1). The procedure for computing the relief is given in rule 21A.

Relief is provided in the following cases:

(i) salary received in advance or in arrears;

(ii) arrears of family pension;

(iii) gratuity;

(iv) compensation on termination of employment;

(v) commutation of pension;

(vi) other payments.

Relief under section 89:

If an individual receives any portion of his salary in arrears or in advance or receives profit in lieu of salary, he can claim relief in terms of section 89 read with rule 21A:

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Relief when salary is paid in arrears or in advance, etc. [Section 81(1)/Rule 21A]:

Where, by reason of any portion of an assessees salary being paid in arrears or in advance or by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of section 17(3) is a profit in lieu of salary, his income is assessed at a rate higher than at which it would otherwise have been assessed, the relief to be granted under section 89(1) shall be as under:

Computation of relief when salary has been received in arrears or in advance [Rule 21A(2)]:The relief on salary received in arrears or in advance (hereinafter to be referred as additional salary) is computed in the manner laid down in rule 21A(2) as under:

1) Calculate the tax payable of the previous year in which the arrears/advance salary is received on:(a) Total Income inclusive of additional salary.

(b) Total Income exclusive of additional salary.

The difference between (a) and (b) is the tax on additional salary included in the total income.

2) 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.

Calculate the difference between (a) and (b) for every previous year to which the additional salary relates and aggregates the same.

3) The excess between the tax on additional salary as calculated under step 1 and step 2 shall be the relief admissible under section 89(1). If there is no excess, no relief is admissible. If the tax calculated in step 1 is less than tax calculated in step 2, the assessee need not apply for relief.

Computation of relief in respect of gratuity other than gratuity exempt under section 10(10) [Rule 21A(3)]:

Under section 89, a relief can be claimed if gratuity is received in excess of the limits specified. However, no relief is admissible if taxable gratuity is in respect of services rendered for less than five years. Cases in which the relief is admissible may be divided into two categories:

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(a) Where the gratuity payable is in respect of past service of 15 years or more:

Step: 1 : Calculate the tax on total income (including gratuity) I the year of receipt of gratuity and calculate the average rate of tax, i.e.,

Total tax x 100

Total income

Step: 2 : Calculate the tax on gratuity on basis of average rate of tax computed in Step 1.

Step: 3 : Calculate the tax liability by adding 1/3 of the gratuity to the total income of each of the preceding three years and calculate the average rate of tax for each year separately.

Step: 4 : Calculate the average of the three average rates computed in the manner specified in Step 3 above and compute tax on gratuity at that average rate.

Step: 5 :The excess, if any, of the tax on gratuity computed at Step 4 will be the relief admissible under section 89(1).

(b) Where gratuity is paid in respect of past services of 5 years or more but less than 15 years:

The procedure for computation of relief is the same except that in Step 3 the number of years for calculating average rate of tax shall be taken as 2 years instead of 3 years and thus of the gratuity will beaded in the total income of the preceding 2 years instead of 3 years.

Computation of relief in respect of compensation on termination of employment [Rule 21A(4)]:

Relief will be available only if the following conditions are satisfied:(a) Compensation is received after continuous service of not less than 3 years.

(b) The unexpired portion of the term of employment is also not less than 3 years.

The procedure for calculating the relief is the same as in the case of gratuity paid to the employee in respect of services rendered for a period of 15 years or more.

Computation of relief in respect of payment in commutation of pension [Rule 21A(5)]:

A relief can be claimed in respect of payment in commutation of pension received in excess of the limits prescribed. Such relief is computed in the same manner as if the gratuity was paid to the employee in respect of service rendered for a period of 15 years or more.

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Computation of relief in respect of other payments [Rule 21A(6)]:

Where the payment is of a nature other than given under Rule 21A(2) to 21A(5), the relief under section 89 will be granted by the CBDT, having regard to the circumstances of each case.

Furnishing of particulars for claiming relief under section 89(1) [Rule 21AA]:

Where the assessee, being a Government servant or an employee in a company, co-operative society, local authority, university, institution, association or body, is entitled to relief under section 89(1), he may furnish to the person responsible for making the payment referred to in section 192(1) the particulars specified in Form No.10E.

In case of other employees, the application for the grant of relief shall have to be made to the Assessing Officer, instead of the employer.

The Assessing Officer should ask for a true and authentic statement of the total income of the earlier years to which the arrears pertain. There is, therefore, no warrant for issuing a notice under section 148 or calling for returns of income of earlier years.