Here’s all you need to know about the Relief when salary, etc. is paid in arrears or in advance:
There are cases wherein an employee, may get salary arrears in the current year, for any past year/s due to pay revision. And when this additional arrear is added with the current year’s income, the tax payable for the current year could be higher because of the change in one’s income tax slab rate to a higher tax slab.
Hence, the Government has introduced Section 89 under the Income Tax Act which comes as a relief in this context, as this provision allows a tax deduction for the additional tax burden on employees receiving salary arrears.
As per Section 89(1), tax deduction/relief is provided by recalculating tax for the year in which arrears are received and the year to which the arrears pertain; and the taxes are adjusted in the year in which they were due. In other words, if the taxpayer is required to pay any additional amount of tax (in the year of receipt) than what he would have originally paid had he received the money in the year(s) that he was supposed to receive it, such additional tax can be reduced from the tax payable.
Let’s discuss further on this…
How to calculate Tax Relief on Salary arrears under Section 89(1)?
Below are the steps to calculate the tax relief amount:
- Step 1 – We need to calculate the tax liability on the total income, including the salary arrears, in the year in which it is received.
- Step 2 – Calculate the tax liability on the total income, excluding the salary arrears, in the year of receipt. This step gives us the tax payable amount, had there been no arrears received in the current year.
- Step 3 – Calculate the difference in tax liability as Step 1 & Step 2. This would be the tax on the additional salary included in the total income.
- Step 4 – Calculate the tax liability on the total income, including the arrears amount received, for the year to which the arrears relate.
- Step 5 – Calculate the tax liability on the total income, excluding the arrears amount received, for the year to which the arrears relate.
- Step 6 – Calculate the difference between the amount calculated as per Step 4 and Step 5. This gives us the actual tax liability for the past year for which arrears are received in the current year.
- Step 7 – The excess amount at Step 3 over Step 6 will be the tax relief allowed under section 89. In case, there is no excess, i.e., if the tax calculated as per Step 3 is less than that calculated in Step 6, the employee need not apply for relief under section 89, i.e., no relief will be allowed.
You may also visit the income tax website to calculate the Relief under Section 89. Here is the link – https://www.incometaxindia.gov.in/Pages/tools/relief-under-section-89.aspx#
Cases where Section 89 applies?
Relief under Section 89(1) is available in the following cases:
- Salary received in arrears or in advance [Rule 21A(2)];
- Gratuity received for past services [Rule 21A(3);
- Compensation on termination of employment [Rule 21A(4)];
- Payment of commutation of pension [Rule 21A(5)]
How can you claim the tax relief calculated under Section 89?
In order to claim the relief under section 89, one must file Form 10E available in the income-tax portal (in the new e-filing portal, log in and on Dashboard, go to e-File > Income tax forms > File Income Tax Forms). Filing of Form 10E is mandatory. In the case of non-filing of Form 10E, the Income Tax Return will be processed but the relief claimed u/s 89 will not be allowed, i.e., the relief under section 89 of the Income-Tax Act will be allowed only if the Form 10E is filed before filing of income tax return.