Taxability of Arrear of Salary – Relief u/s 89


(Last Updated On: March 14, 2018)

Usually salary income is received as it becomes due but many a times an employee may receive any 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.

 

The Relief is available under the following cases:

  • Salary received in arrears or in advance;
  • Salary for more than 12 months in one financial year;
  • Family Pension being paid 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 paid is actually higher due to receipt of such arrears. If there is no extra tax liability, relief is not allowed. In case of VRS Compensation being received by the employee no relief shall be granted under Section 89 if one has claimed exemption u/s 10(10C) for Voluntary Retirement Scheme. An assessee can claim either exemption under section 10(10C) or relief u/s 89 but not both together.


To calculate the relief, the following steps should be taken:


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 X (Step 3) from Y (Step 6) and you will get the relief amount.

 

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


Suraj earned Rs. 15,00,000 p.a. in FY 2016-17 and also received an arrear of Rs. 3,00,000 p.a. for FY 2014-15. His total salary in FY 2014-15 was Rs. 6,00,000 p.a.

 

The table below explains the calculation of relief:

 

Particulars

Tax liability for F.Y. 2016-17

Tax Liability for F.Y. 2014-15

Salary inclusive of arrears

Salary without arrears

Salary inclusive of arrears

Salary without arrears

Step -1

Step -2

Step -4

Step -5

Salary

18,00,000

15,00,000

9,00,000

6,00,000

Income Tax

3,65,000

2,75,000

1,05,000

45,000

Cess

10,950

8,250

3,150

1,350

Total Tax Liability

3,75,950

2,83,250

1,08,150

46,350

Step- 3
Tax at (1) – Tax at (2)

92,700

Step- 6

Tax at (4) – Tax at (5)

( Column Merge required)––

 

( Column Merge required)–

61,800–

Relief u/s 89 : Step 3 – Step 6

30,900

Tax payable :-
Tax at (1) – Relief

3,45,050

 

Relief under section 89 = X-Y = 92700-61800=30900.

Now, after the calculation of relief let’s talk about the mandatory requirement in these cases:

 

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.

 

Now, let’s understand the process to file Form 10E:

The steps to file Form 10E online –

  • Now click on tab named ‘e-File’ and select ’Income Tax Forms’.

  • The screen shall appear as below. From the 1st drop down select Form 10E.

  • Now select the Assessment Year for which Form 10E is to be filed and fill the submission mode as “Prepare and submit online.”

  • Now when you will 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 on click on “Save Draft” while filling the form and lastly click on “Preview & submit “and you are done with it.

 

Conclusion:

When in a financial year an employee receives salary in arrears or advance then in order to save you from any additional burden of tax due to delay in receiving income as per section 89(1) of the Income Tax Act, 1961 relief for income tax has been provided. However, for claiming this relief he/she must have to submit the form 10E with income tax department.


Author


Team Tax2Win