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  7. Taxability of Arrear Salary & Relief u/s 89

Relief under section 89 | Taxability in case of Arrear of Salary

Updated on: 26 Apr, 2023 03:10 PM

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 during employment. In that case, relief of tax u/s 89 is allowed under the 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 salary and not in the year in which 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.

Contents

When is Relief u/s 89 available?

Relief under section 89 is available when

  • 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 receipt of such arrears. If there is no extra tax liability, relief is not allowed.

Is Relief u/s 89 available in the case of VRS Compensation?

Yes, relief under section 89 is available if the employee has not claimed the tax exemption 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 case of family pension 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.
  • 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: Then 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)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 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:

Particulars Tax Liability for FY 2022-23 Tax Liability for FY 2021-22
Salary inclusive of arrears Salary without arrears Salary inclusive of arrears Salary without arrears
Step -1 Step -2 Step -3 Step -4
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 Step (1) – Tax at Step (2) 93600 -
Step- 6 (Y) Tax at Step(4) – Tax at Step (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 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. There are annexures 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 on termination of the job. For pension, annexure IV is required to be filled along with the form.

What is the process for filing 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 Login into your income tax portal
  • Step 2: Now click on the tab named ‘e-File’, select ‘Income Tax Forms’, and click on File Income Tax Forms. 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.FORM-10E
  • Step 4 : Now select the Assessment Year for which Form 10E is to be filed.Assessment Year
  • Step 5: Now, when you click on continue after selecting assessment year, the Form 10 E screen shall appear as below. You may select arrear salary and other options as applicable.Select arrear salary
  • Step 6: Now, when you click on continue after selecting the form of arrear, the Form 10 E screen shall appear as below.Select arrear salary

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 last year's salary arrears, I have to pay additional income tax. Is there any solution to the distribution of arrears if the previous year's ITR is filed?

To save you from paying higher taxes on arrears, section 89 is introduced. If the total income of the previous year includes salary arrears, then you can claim 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 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 the previous year's income tax return to get the benefit of section 89 for the 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), filing Form 10E and an income tax return is mandatory.

Q- What is “Less: Rebate u/s 87A” reflected in the 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 part of the salary and salary arrears come under the purview of Section 89, hence, HRA arrears can be claimed under this section.

Q- How should I get the benefit of tax exemption for the arrears of the family pension received on 27 March relating to the previous three financial years?

To avail tax benefits for the arrears, individuals must file Form 10E. Form 10E is a 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. To understand how to calculate the tax benefit under section 89, please refer to the detailed calculation explained above.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.

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