Avail of tax relief on terminal compensation: Here's how to file Form 10E

You must have completed 3 years of continuous service and have another 3 years of employment left

Many lost their jobs in financial year 2020-21 (FY21) because of the pandemic-led disruption. Any compensation such a person received from their employer when terminated is taxable as salary in their hands at the slab rate applicable on them. However, the employee can claim tax relief on this income under Section 89 of the Income Tax (I-T) Act, according to Rule 21A of the I-T Rules, 1962.

Apart from compensation on termination, relief under Section 89 is also allowed on several other types of incomes. Chartered accountant Vikash Mittal, partner, Vikash Mittal and Associates, says, “It could be salary received in arrear or advance, arrear of pension, premature withdrawal of provident fund, gratuity, and commuted pension.”

Conditions apply

A person is eligible for relief if he has received compensation due to termination of employment, which could be due to any of the following reasons—resignation, dismissal, compulsory retirement, or on attaining superannuation.

To avail of this relief, the person needs to fulfil certain conditions. Kapil Rana, founder and chairman, HostBooks, says, “According to the provisions of Rule 21A(1)(c) and 21A(4), a person will be eligible to claim relief under Section 89 on compensation received or receivable by him provided he has rendered continuous service for three years or more, and the unexpired portion of his term of employment is also three years or more.”

Relief is also available on the amount received as gratuity. This is available only if the employee has completed five years of service. Naveen Wadhwa, deputy general manager, Taxmann, says, “If gratuity received by the employee is eligible for tax exemption, no relief is admissible for the exempted portion. Only the portion in excess of the exempted amount is included in gross salary income and is eligible for relief. If the whole of gratuity is exempt, no relief is admissible.”

Who cannot claim relief?

If relief is claimed by an employee under Section 89 on compensation received upon voluntary retirement, no other exemption will be allowed to him. He can claim exemption up to Rs 5 lakh on voluntary retirement compensation. Wadhwa says, “The employee can claim either exemption up to Rs 5 lakh or relief under Section 89, not both.”

Fill Form 10E

The employee must claim relief when he files his I-T return for the year in which he received the lump-sum payment. For this purpose, he needs to furnish Form 10E. Mittal says, “This form must be furnished before filing the I-T return.”

This form can be filed online on the income tax e-filing portal. In the past, many taxpayers who have claimed relief under Section 89 but have not filed form 10E have received a notice from the tax department. If you feel you will not be able to fill it on your own, seek professional advice to avoid receiving a notice.