Leave encashment income tax relief under sec 89

POSTED BY Ankur ON June 22, 2012 10:22 pm COMMENTS (7)

I left my previous company in Sep2011 and joined new company in oct2012.
1. I encashed my leave in Aug2011 for 58000 rupees. I thought leave encashment is non taxable. Now I got to know that the leave encashment during service is taxable but relief can be claimed under section 89. Now I am not able to figure out how much relief can I get and what is the procedure to avail that benefit.
2. While leaving my previous company, I paid 2.1lac against notice pay+service bond+training bond. Can I reduce this (or any partial) amount from my total salary to avail tax benefit?
Please help.

7 replies on this article “Leave encashment income tax relief under sec 89”

  1. anand says:

    sir,
    my doubt is leave encashment salary received during the year, while being in service of a govt employee is eligible for IT relief, if yes then from section 89 or 10.
    awaiting reply
    regards,

  2. Ankur says:

    Dear Ashal,

    Thanks for the reply. I however, has following more queries:

    1. The leave accumulation was over a period of past 8years, so is it okay if I calculate leave encashment relief over past 3years?

    2. How to apply for relief under section 89. Any special ITR form is to be used?

    3. Procedure laid down is not intelligible, could you please explain it with help of example.

    Assuming 48000 leave encashment in total.

    300000 total salary in 08-09, 09-10 each say tax paid in the respective years was 2000 and 3000.
    450000 total salary in 10-11say tax paid was 8000
    700000 total salary in 11-12.

    Regards,
    Ankur

    1. Dear Ankur, here is the answer for your queries.

      1. Yes it’s OK to go for 3Y split for the leave accumulated for 8Y period.

      2. ITR-1 if your income is from salary, home loan & other sources only. In case you do have capital gains also, or more than 1 home loan, ITR-2. so basically the same ITR you are using to file your normal income tax return.

      3. Here is the calculation. I’m giving example, not exact nos. as for exact nos. I need your full data regarding home loan, 80C saving etc…….

      A. For FY 2011-2012 Tax on normal Income with out leave encashment amount = 60000
      B. Tax on income including leave encashment = 70000
      C. Tax loading due to leave amount inclusion = 10000
      D1. Tax for 16000 (48000/3) Rs. added into FY 2008-2009 = 1600
      D2. Tax for 16000 (48000/3) Rs. added into FY 2009-2010 = 1600
      D3. Tax for 16000 (48000/3) Rs. added into FY 2010-2011 = 3200
      D4. Total tax liability for split = 6400
      Section 89 Relief = C – D4 = 10000 – 6400 = 3600 Rs.

      Thanks

      Ashal

  3. Dear Ankur, Please check the following steps –

    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 additional salary is received.

    3. Find out the difference between the tax at (1 ) and (2).

    4. Compute the tax on the total income after including the additional salary in the previous year to which such salary relates. In your case, split your leave encashment amount in 3 prev. years.

    5. Compute the tax on the total income after additional salary in the previous year to which such salary relates.

    6. Find out the difference between tax at (4) and (5)

    7. The excess of tax compute at (3) over tax computed at (6) is the amount of relief admissible under section 89. No relief is, however, admissible if tax computed at (3) is less then tax computed at (6). In such a case, the assessee- employee need not apply for relief.

    Thanks

    Ashal

  4. Ankur says:

    Dear Ashal,

    My tax slab in last three years were as follows:

    2008-09 – 10percent,
    2009-10 – 10 percent
    2010-11 – 20percent

    2011-12 – I resigned from the job.

    How can I calculate relief?

    Regards,
    Ankur

  5. Dear Ankur, the section 89 benefit ‘ll be available to you for that leave encashment thing but the important point is what were your tax slabs for past 3Y before resigning that job?

    No the notice amount paid by you is not available to any benefit against any tax liability.

    Thanks

    Ashal

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