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Relief under section 89 | Taxability in case of Arrear of Salary
Usually salary income is received as it becomes due but it's quite often that an employee may receive a component of his salary in the form of arrear or advance salary in the course of employment. In that case relief of tax u/s 89 is allowed under Income Tax Act, 1961 as then the assessee might have to pay higher taxes because the arrear /advance salary is taxed in the year of receipt of the same and not in the year in which it is actually due. The difference in the tax liability in due year and in the receipt year might be due to changes in the slab rates. For this reason, the provision of relief u/s 89 comes in.
When is Relief u/s 89 available?
Relief under section 89 is available when
- Salary received in arrears or in advance;
- Salary received for more than 12 months in one financial year;
- Family Pension being 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 tax payable is actually higher due to receipt of such arrears. If there is no extra tax liability, relief is not allowed.
Is Relief u/s 89 available in case of VRS Compensation?
Yes, relief under section 89 is available if the employee has not claimed the tax exemption which is available under section 10 (10C).
What are the steps to claim relief under section 89?(This calculation is applicable only in case of Salary received in arrears or in advance or, in case of family pension arrears)
Step 1: Firstly, calculate the tax due in the current year by including the arrears in your total income.
Step 2: Now calculate the tax due in the current year by excluding the arrears from your total income.
Step 3: Compute the difference of the two figures of Step 1 & 2 and let’s call that difference as ‘X’.
Step 4: Now Calculate your tax due in the year for which the arrears have been received by including the arrears in your total income.
Step 5: Then Calculate your tax due in the year for which the arrears have been received by excluding the arrears from your total income.
Step 6 : After that compute the difference of the two figures of Step 4 & 5 and let’s call the difference as ‘Y’.
Step 7: Lastly subtract Y (Step 6) fromX (Step 3)and you will 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 FY 2019-20 and also received an arrear of Rs. 3,00,000 p.a. For FY 2018-19. His total income in FY 2018-19 was Rs. 6,00,000 p.a.
The table below explains the calculation of relief:
| Particulars | Tax Liability for FY 2019-20 | Tax Liability for FY 2018-19 | ||
| Salary inclusive of arrears | Salary without arrears | Salary inclusive of arrears | Salary without arrears | |
| Step -1 | Step -2 | Step -4 | Step -5 | |
| Total Income | 18,00,000 | 15,00,000 | 9,00,000 | 6,00,000 |
| Income Tax | 352500 | 262500 | 92500 | 32500 |
| Cess | 14100 | 10500 | 3700 | 1300 |
| Total Tax Liability | 366600 | 273000 | 96200 | 33800 |
| Step- 3 (X) Tax at (1) – Tax at (2) | 93600 | – | ||
| Step- 6 (Y) Tax at (4) – Tax at (5) | 62400 |
|||
| Relief u/s 89 : Step 3 – Step 6 | 31200 | |||
| Tax payable :- Tax at (1) – Relief | 335400 | |||
Relief under section 89 = (X) - (Y) = 93600 - 62400= 31200.
What is the mandatory requirement to claim relief under section 89?
To claim relief u/s 89, you must submit Form 10E online on the Income Tax Website before filing the Return of Income. Remember, your salary slips serve as proof of receipt of arrears therefore should be kept safely.
What is Form 10E?
Form 10E is the form for furnishing particulars of income under section 192(2A) for claiming the relief. The features of Form 10E :
- Form 10E has details regarding the total income of employees and arrears or specified incomes received.
- The form 10E is to be filed before filing of 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 filing of form 10E in order to get the claim.
- Submission of 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 login to the account. If visiting the portal for the first time then you should register and create valid id and password. The form 10E is available in the income tax forms section. With some easy steps and filling of the required information you can submit the form on the portal. There are annexures given while filling the form.
- You have to select the relevant annexure and fill it. Annexure I is for the arrear amount. Annexure II is for the gratuity and annexure III is for the compensation received on termination of job. For pension annexure IV is required to be filled along with the form.
What is the process to file Form 10E?
The steps to file Form 10E online is –
- Step 1 : Login to income tax India efiling website with your User ID, password
- Step 2 : Now click on tab named ‘e-File’ and select ‘Income Tax Forms’.
- Step 3 : The screen shall appear as below. From the 1st drop down select Form 10E.
- Step 4 : Now select the Assessment Year for which Form 10E is to be filed and select the submission mode as "Prepare and submit online."
- Step 5 : Now when you click on continue, the Form 10 E screen shall appear as below. You may read the instructions on how to file Form 10E given in the 1st blue tab and then enter the relevant information by clicking on other blue tabs.
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.
Frequently Asked Questions
Q- Due to past year's salary arrears I have to pay additional income tax. Is there any solution to the distribution of arrears if previous year ITR is filed?
To save you from paying higher tax on arrears, section 89 is introduced. If the total income of previous year includes salary arrears, then you can avail relief under section 89(1).
Q- What are the methods to save tax on arrears?
Section 89(1) of the Income Tax Act, 1961 states that if an assessee's income has dues of salary from the previous year, then the assessee can claim relief as per the procedure of section 89(1).
Q- Can I claim relief for an arrear of past years under section 89 if it is not mentioned in form 16 and shown as gross income of the current year?
If the relief u/s 89 is not mentioned in Form 16, there is nothing to worry, you can still claim the relief by providing all the details related to arrears at the time of filing of return.
Q- Is it necessary to file previous year's income tax return to get the benefit of section 89 for arrear salary received?
There is no such requirement by the IT department. The only thing required is the documents and details of the previous years income in respect of which arrears are received to claim relief under section 89
Q- Is the filing of an individual income tax return mandatory to claim relief u/s 89 of the Income Tax Act?
To claim relief under section 89(1), the filing of Form 10E and income tax return is mandatory.
Q- What is “Less: Rebate u/s 87A” reflect in salary slip as per India income tax?
Rebate under section 87A means tax rebate available to the resident individuals whose total income does not exceed Rs.5 lakhs . For this rebate no additional investment is required.
Q- Can I claim relief under Section 89 of the Income Tax Act for HRA arrears?
HRA is the part of the salary and salary arrears comes under the purview of Section 89, hence, HRA arrears can be claimed under this section.
Q- How should I get benefit of tax exemption for the arrears of family pension received on 27 March relating to previous three financial years?
To avail tax benefits for the arrears, individuals are required to file Form 10E. Form 10E is a necessary requirement under section 89 to claim a deduction for the arrears including family pension arrears.
Q- Is relief u/s 89 available for advance salary received?
Yes, Relief u/s 89 of the Income Tax Act can be claimed for receiving any portion of salary as an advance salary. For understanding how to calculate the tax benefit under section 89 please refer to the detailed calculation explained above.
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