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

How does Section 89 relief help you from paying a higher tax due to arrears of salary?

Income tax is applicable and calculated on the taxpayer’s total income earned or received during the financial year. If the taxpayer has received a portion of their salary ‘in arrears or in advance’ or received a Family Pension in arrears, this may lead to put you in higher tax bracket.

To reduce this tax burden, the assessee can claim relief under section 89. The assessee might have to pay higher taxes because the arrear /advance salary is taxed in the year of receipt, not in the year it is due. The difference in the tax liability in the due year and the receipt year might be due to changes in the slab rates. For this reason, the provision of relief u/s 89 comes in.

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When can you claim tax relief under Section 89?

An employee must meet certain conditions to claim relief under Section 89(1):-

• Salary is received in arrears or in advance;
• Salary received for more than 12 months in one financial year;
• Family Pension is received in arrears;
• Gratuity
• Compensation on termination of employment; and
• Commuted Pension

One important thing to note is that relief can only be claimed if the tax payable is higher due to the receipt of such arrears. If there is no extra tax liability, relief is not allowed.

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Why is Section 89(1) important for tax-savings?

Section 89(1) of the Income Tax Act in India offers a tax relief benefit to taxpayers who receive income in arrears or advance. Here's how it benefits you:

• Reduces your tax liability: Since income tax is calculated on your total income for the year, receiving a bunch of income from a previous year (arrears) in the current year could push you into a higher tax bracket. Section 89(1) helps avoid this by recalculating your tax for both the year you receive the arrears and the year it relates to, ensuring you don't pay more tax due to a delay in receiving income.
• Fairness in taxation: This provision ensures that you are not unfairly burdened by a higher tax rate simply because you received income late.

Simply put, it prevents you from having to pay extra tax due to circumstances beyond your control, where income meant for one year is received in another.

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How to calculate relief under Section 89 (1) on salary arrears

• Step 1: First, calculate the tax due in the current year, i.e., the year of receipt of salary, by including the arrears in your total income. The arrears provided will reflect in Part B of Form 16.
• Step 2: Now calculate the tax due in the current year, i.e., the year of receipt, by excluding the arrears from your total income.
• Step 3: Compute the difference between the two figures of Steps 1 & 2, and let’s call that difference ‘X.’
• Step 4: Now Calculate your tax due in the year, i.e., the year in which your arrear salary was due for which the arrears have been received by including the arrears in your total income.
• Step 5: Calculate your tax due in the year, i.e., the year in which your arrear salary was due for which the arrears have been received by excluding the arrears from your total income.
• Step 6: After that, compute the difference between the two figures of Steps 4 & 5, and let’s call the difference ‘Y.’
• Step 7: Lastly, subtract Y (Step 6) from X (Step 3) to get the relief amount.

This can be better understood with the help of the example below:

Total Income of Suraj was Rs. 15,00,000 p.a. in FY 2022-23 and also received an arrear of Rs. 3,00,000 p.a. For FY 2021-2022. His total income in FY 2021-22 was Rs. 6,00,000 p.a.

The table below explains the calculation of relief:

Relief under section 89 = (X) - (Y) = 93600 - 62400= 31200.

Similarly, tax liability for FY 2023-24:-

Need help calculating tax on salary arrears or advances? Minimize your tax liability and claim maximum relief under Section 89 with our expert Tax Advisory Service.

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About Form 10E

To claim relief u/s 89, you must submit Form 10E online on the Income Tax portal before filing the Return of Income. Remember, your salary slips serve as proof of receipt of arrears therefore, should be kept safe.

Form 10E is the form for furnishing particulars of income under section 192(2A) for claiming relief. The features of Form 10E:

• Form 10E has details regarding the total income of employees and arrears or specified incomes received.
• Form 10E is to be filed before filing the income tax returns. If the form 10E is not filed by the employee and if they claim for the tax relief, then the Income Tax Department will notify them regarding the filing of form 10E to get the claim.
• Submitting Form 10E is quite easy as the form is available on the Income Tax Department’s e-portal. You just have to visit the portal and log in to the account. If visiting the portal for the first time, then you should register and create a valid ID and password. Form 10E is available in the income tax forms section. With some easy steps and filling in the required information, you can submit the form on the portal. Annexures are given while filling out the form.
• You have to select the relevant annexure and fill it in. Annexure I is for the arrear amount. Annexure II is for the gratuity, and Annexure III is for the compensation received upon termination of the job. For pension, annexure IV is required to be filled along with the form.

To claim relief under Section 89, you must submit Form 10E online on the Income Tax portal before filing ITR. Remember, your salary slips serve as proof of receipt of arrears and, therefore, should be kept safe. Connect tax experts

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How to file Form 10E?

The steps to file Form 10E online is –

• Step 1: Log in to https://eportal.incometax.gov.in/iec/foservices/#/login with your User ID i.e. PAN, password
  
  
• Step 2: Now click on the tab named ‘e-File’, select ‘Income Tax Forms’, and click on File Income Tax Forms.
  
  
• Step 3 : The screen shall appear as below. From the 3 options, select persons without business and professional Income and then select FORM 10E.
  
  
• Step 4 : Now select the Assessment Year for which Form 10E will be filed.
  
  
• Step 5: When you click on continue after selecting the assessment year, the Form 10 E screen shall appear as below. You may select arrear salary and other options as applicable.
  
  
• Step 6: Now, when you click on continue after selecting the form of arrear, the Form 10 E screen shall appear as below.
  
  

Don’t forget to click on “Save Draft” while filling out the form, and lastly, click on “Preview & submit, “and you are done with it.

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Income Tax Notice for Non-filing of Form 10E

An income tax notice for non-filing of Form 10E is a communication from the tax authorities to an individual or entity who has claimed relief under section 89(1) of the Income Tax Act but has failed to submit Form 10E.

Form 10E is used to claim relief for arrears or advance salary, particularly when there has been a delay or non-receipt of salary in a particular year or when salary is received in advance. This form aims to ensure that the taxpayer receives the appropriate tax relief for such income.

When the tax authorities identify that a taxpayer has not filled this form and still claimed relief under 89(1) while filing the return, they issue a notice to bring this non-compliance to the taxpayer's attention. The notice serves as a reminder and requests the taxpayer to file the form and provide the necessary information to claim the relief.

The notice will typically specify the reasons for the non-filing of Form 10E and provide a deadline for compliance. It may include instructions on submitting the form and any supporting documents. It is important to respond to such notices promptly and take the necessary steps to comply with the requirements outlined by the tax authorities. Failure to do so may result in an ITR being filed, but relief will be disallowed.

Avoid the hassle of scrutiny from the Income Tax Department due to inadequate assistance. Our team of tax experts is here to support you in filing Form 10E, optimizing your tax refund, and saving you valuable time during e filing income tax return. Don't wait until the last date to file ITR. Book eCA Today!

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