How To Claim Tax Relief On Salary Arrears Under Section 89

How to Claim Tax Relief on Salary Arrears under Section 89?

Section 89(1) enables taxpayers to claim relief for past income by recalculating taxes for both the year of receipt and the original year.

Written by : Shipra Chaudhary

Reviewed by : Lalit Lata

Lalit Lata

2023-07-06

4313 Views

9 minutes read

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The advance or arrears received from an employer affect your taxes and are reflected in the year of receipt. Relief under Section 89(1), according to Income Tax Act saves you from additional tax burden if there is a delay in receiving income.

An employee must meet certain conditions to claim relief under this section. To start with, Section 89 reliefs can be claimed on any of the following received during a particular year:

  • Salary received in arrears or in advance
  • Premature withdrawal from Provident Fund
  • Gratuity
  • Commuted value of pension
  • Arrears of family pension
  • Compensation on termination of employment

Table of Content

Section 89(1) – Relief of Salary

Tax is calculated on your total income earned or received during the financial year. If you have received a portion of your salary ‘in arrears or in advance’ or received a Family Pension in arrears, then you may be worried about paying higher taxes on such an amount. Tax liabilities for a taxpayer are calculated from the income earned during that financial year. This income can include past dues paid in the current year. Tax rates increase over the years, and thus, you may have to pay higher taxes in such cases.

Under this condition, the Income Tax Act allows you to claim a tax rebate under Section 89(1). Thus, you do not have to pay more in case of delay in payments to you.

Claiming Relief under Section 89

As per Section 89(1), tax 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. You can claim relief under Section 89 by submitting Form 10E. It has to be filed online at the Income Tax Department's e-filing portal.

Note: Form 10E has to be filed before filing the Income Tax Return.

How to Calculate Tax Relief under Section 89(1) on Salary Arrears?

Now that you know what is section 89 of Income Tax Act, let’s understand how to calculate your tax relief on the salary arrears. Here is a step-by-step guide that you can follow:

  1. Calculate tax payable on the total income, including additional salary, arrears or compensations, in the year it is received.

  2. Calculate tax payable on the total income, excluding any additional salary, in the year it is received.

  3. Subtract the calculation derived from Step 2 from the total salary calculation from Step 1.

  4. Calculate tax payable on the total income, excluding arrears, for the year to which the arrears relate.

  5. Calculate tax payable on the total income, including arrears, for the year to which the arrears relate.

  6. Now calculate the difference between Step 4 and Step 5.

  7. Excess of the amount at Step 3 over Step 6 is the tax relief that will be allowed to you, while in case the amount in Step 6 is more than the amount in Step 3 no relief will be allowed.

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Five Things to Remember when Claiming Relief on Arrears

When claiming relief on arrears under Section 89 of the Income Tax Act, there are numerous things that you must consider for easy and error-free application. Here’s a list of five things that you must keep in mind:

  • Form 10E must be filed online. All taxpayers who claimed relief in the last financial year but did not file Form 10E will receive a notice from the Income Tax department for non-compliance; however, your return will not processed until you submit the form.
  • Salary is usually taxable when it is due or when it is received, but in case of arrears, they are usually announced from a back date, which is why they cannot be taxed when due.
  • Submit Form 10E before filing your ITR. When it comes to choosing the assessment year for arrears, you must choose the assessment year in which arrears have been received. For example, if arrears were received in FY 2017-18, the assessment year shall be AY 2018-19.
  • A copy of Form 10E is not required to be attached to your tax return. However, you must file and keep all documents in your records.
  • Your employer may ask for a confirmation of submission of Form 10E; however, it is not necessary to submit this form to the employer.

How to File Form 10E? How to File the Claim Form?

This form is required to furnish details of the income received under section 192(2A). The income tax department has made it compulsory to fill out form 10E to avail of and claim relief under section 89(1) regarding salary arrears. The Government has directed that this form be filed before filing the income tax return.

You can fill out the form yourself by following a few simple steps:

Step 1: Log in to the income tax filing site and click the link below to access the filing website.

Link: www.incometaxindiaefiling.gov.in

Step 2: Click on the ‘Login’ button located at the top right corner. Enter the particulars that are required by the site:

  • User ID (PAN No. or AADHAR No.)
  • Password

Step 3: After logging in, click on the E-file tab---> ‘Prepare and submit the online form’(Can be found in the drop-down menu)

Step 4: Click on the drop-down list of FORM NAME

Step 5: Find Form 10E and click on it. Choose the assessment year and click on the ‘Continue’ button.

Step 6: Please select the applicable items from the list of annexures.

Step 7: Check for the personal details, click on the ‘save’ button and save your selected annexure

Step 8: Enter the total income, arrear income, etc.

Step 9: Verify the entered details. Click on save and then proceed.

Wrapping Up

Understanding and claiming tax relief on salary arrears under Section 89 of Income Tax Act is crucial for taxpayers facing delayed income payments. This provision alleviates the additional tax burden that may arise when income, such as salary arrears or gratuity, is received after its due date. By recalculating taxes for the relevant years and adjusting them accordingly, Section 89(1) ensures fairness in tax assessment. For more detailed guidance and assistance, you can consult with a tax professional to ensure compliance and maximise your tax benefits under Section 89(1).

Glossary

  • Arrears of Salary: Payments received for past periods of work that were not paid in the year they were due. It affects tax liabilities.
  • Gratuity: Employment payments to employees as a token of gratitude for their services, and the amount is eligible for relief under Section 89.
  • Form 10E: A form required to claim relief under Section 89(1), which needs to be filed online before submitting the income tax return.
  • Compensation on Termination: It refers to the lump sum payments received due to termination of employment and affects tax calculations and relief claims.
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FAQs Related to Tax Relief Under Section 89

To reduce the additional tax burden from arrears, section 89 of the Income Tax Act is introduced, within which if the total income of the previous year includes salary arrears, you can avail tax relief under section 89(1).

Yes, you can claim the relief by providing details related to your arrears at the time of filing the return, even if it is not mentioned in Form 16.

HRA is considered a part of the salary and all salary arrears come under the purview of Section 89, hence it can be claimed under this section.

The government to avoid the problem of over-taxation due to advance or arrear of salary, allows you to claim a tax-relief u/s 89. Form 10E is required to claim this relief.

There can be times when you do not receive your salary on time. You may receive your salary later or maybe earlier than the due date. According to the Income Tax Act, salary is taxed in the year in which it is received. In a case when you have received a salary that was due the previous year, in this FY, then it can unnecessarily increase your tax liability.

The Income Tax Department has made filing form 10E compulsory to claim the tax relief u/s 89. This has been applicable since FY 2014-15. While filling out the form, you have to choose the relevant Assessment Year (AY). Assessment year or AY is the immediate next financial year after the financial year for which you have to pay taxes. While filing Form 10E, choose the Assessment Year in which you received your arrears. For example, if you have received arrears in the FY 2019-20, then your AY will be the following year, i.e., 2020-21.

No, you do not need to attach a copy of Form 10E along with your tax return statement. Form 10E is available online and can be filled out on the income tax filing website itself. So, once you have filled out the form, you do not need to attach it to your Income-tax return. Income tax does not require any annexures. However, you are advised to keep your documents safe so you can submit them if the need arises in the future.

Income tax is charged based on the ‘slab system’ in India. Slabs are created on the basis of income and each slab has a different tax rate. You will pay the tax according to the slab you fall in.