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T. Banusekar

I WORK for a bank. An `Optional Early Retirement Scheme' has just been introduced by the bank. Under the plan, the bank will pay employees opting for the scheme an ex-gratia. Will this ex-gratia qualify for exemption under Section 10(10C)? Will the excess over the sum that is exempt under Section 10(10C) qualify for relief under Section 89(1)?

If my employer does not take into account the exemption and relief under Sections 10(10C) and 89(1) in computing the tax to be deducted at source, will it be possible for me to put in a refund claim for the same in my IT return?

Chitra S.

Reply

The ex-gratia may qualify for exemption under Section 10(10C). The excess over the sum exempt under Section 10(10C) would also qualify for the relief under Section 89(1). If your employer does not take into account the exemption and relief under Sections 10(10C) and 89(1) in computing the tax to be deducted at source, it will be possible for you to claim the same in your return and thus expect a refund arising out of the excess tax deducted at source by your employer.

It appears that the scheme isa voluntary retirement scheme, for the same can be enjoyed purely at the option of the employee. The exemption under Section 10(10C) is available in respect of sums received on voluntary retirement or termination of service. This exemption will be available only if the scheme of voluntary retirement is framed in accordance with the guidelines prescribed under the section read with rule 2BA. This exemption is subject to a maximum of Rs 5 lakh. Therefore, the sum received by you under the optional early retirement scheme will qualify for exemption under Section 10(10C) provided it is framed in accordance with the guidelines.

Section 89(1) entitles an assessee to relief if he has received a salary in arrear or in advance or a salary in one financial year for a period exceeding 12 months or a family pension in arrears. This relief is meant to mitigate the hardship that may be caused due to such amounts received being taxed at a higher rate than at which he would have otherwise been assessed for that financial year.

Rule 21A of the I-T Rules, which deals with the computation of relief, provides for the relief being available in the following cases:

a) Where any portion of the assessee's salary or family pension is received in arrears or advance;

b) Where payment is towards gratuity in respect of past services for a period of five years or more;

c) Where the payment is towards compensation on termination of employment after continuous service of three years or more and where the unexpired portion of his term of employment is also not less than three years;

d) Where the payment is in commutation of pension; and

e) Where the payment is not covered by the above if permitted by the Board

The relief under Section 89(1) will be available under (c) above, and is to be computed as follows:

i) compute the total income, including the compensation received;

ii) compute the tax on total income, including the compensation received;

iii) calculate the average rate of tax applicable on total income dividing the tax on total income by the total income;

iv) multiply the average rate of tax with the amount of compensation received to find out the tax payable on compensation;

v) take the total income of three previous years immediately preceding the previous year in which compensation is received;

vi) add a third of the compensation received in the total income of each of the preceding three previous years;

vii) find the tax on total income of each of the preceding three previous years after adding a third of the compensation;

viii) find the average rate of tax of each of the preceding three previous three years by dividing the tax on total income by the total income;

ix) find the average of average rates of tax as calculated above for the preceding three previous years; and

x) multiply the average of average rates of tax with the amount of compensation received.

The relief under Section 89(1) is the difference between the figures arrived at steps (x) and (iv).

The relief is to be computed only in respect of that much of the compensation as in excess of the sum exempt under Section 10(10C). In other words, the compensation that is to be increased and spread over the three-year period as stated above is the amount of compensation which is not exempt under Section 10(10C).

Query

Will fee paid by me for my children to undergo typewriting and shorthand classes be eligible for rebate under Section 88? Will special fee and tuition fee charged by colleges be eligible for this rebate? Will fee paid for undergoing computer-training courses with private institutions qualify for the rebate?

Can I continue to claim the exemption under Section 10(14) in respect of the educational allowance that I receive, though I would be claiming the expenditure on the education of my children as being eligible for rebate under Section 88?

V. Sivaraman

Reply

The tuition fee charged by the college will qualify for rebate. It appears that the special fee may also qualify for the rebate. The fee paid for undergoing typewriting and shorthand classes or computer courses will not qualify for rebate. The exemption under Section 10(14) in respect of educational allowance should continue to be available even though you are claiming rebate under Section 88 in respect of the expenditure incurred for educating your children.

Under Section 88, tuition fees (excluding development fees, donations or other payments of similar nature) paid for full time education of any two children of an individual will qualify for rebate. This payment of tuition fee should be to a university, college, school or other educational institutions situated within India. The amount that will qualify for rebate should not exceed Rs 12,000 per child.

It can, therefore, be seen that the tuition fee will qualify for rebate provided it is paid for the full time education in the college. Special fee has specifically not been excluded. What has been excluded from the eligibility for rebate is only development fees, donations or other payments of similar nature. It is, therefore, felt that the special fee will also qualify for rebate.

The fee paid for your children to undergo typewriting, shorthand lessons or computer courses cannot be claimed to have been paid to a university, college, school or other educational institution.

Further, the same cannot be claimed to be full-time education and, hence, such fee will not qualify for rebate.

The exemption under Section 10(14) is available to the extent of Rs 100 per month per child subject to a maximum of two children. This exemption is available notwithstanding that the sum has actually been spent. Given this, it is felt that merely because the expenditure on education of the children has been claimed as qualifying for rebate under Section 88, the exemption under Section 10(14) cannot be denied.

Furthermore, there appears to be no prohibition on claiming this exemption either under Section 10(14) or 88.

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