Arrears of Salary – Taxability & Reliefs Section 89(1)

Arrear salary refers to the payments that an employee receives for a previous period, which were not disbursed during the regular pay cycle. These can include pending increments, bonuses, or any other components of the total salary. Arrear salary is taxed in the year it is received, not the year to which it pertains. This can potentially lead to a higher tax liability for the year when arrears are paid.

Reliefs Section 89(1)

Section 89 of the Income Tax Act, 1961 is granted relief to the assessee in respect of Taxability of Arrears of Salary. Here has been a continuous rise in the rates of taxes year after year. Thus, it is clear that the arrears of salary, which increase the total income in a later year, attract a higher rate of tax merely because they were received late. Section 89 (1) provide relief from this higher rate of tax.

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

Steps to claim relief under section 89

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

Form 10E 

Employees receiving arrears can claim relief by involving the provisions of Section 89(1) and filing Form 10E, which must be filed before filing an Income Tax Return. Assessee can file the form after logging into the income tax portal using their login credentials.

Steps to File Form 10E :

Step 1: Log in to www.incometax.gov.in with your User ID and password.

Step 2: After you have logged in, click e-File > Income tax forms > File Income Tax Forms.

Step 3: Click on the ‘Persons not having any business/professional income’ tab and select Form-10E.

Step 4: Select the assessment year and click on the ‘Continue’ button.

Step 5: Click on the ‘Let’s Get Started’ button to start filling up the form.

Step 6: Now select the relevant items regarding the particulars of income and click on the ‘Continue’ button.

Step 7: In the next screen, click on the links and provide details for each section.

Step 8: After filling in all the details in the Form-10E, click on the ‘Preview’ button.

Step 9: On the preview page, proceed to e-verify.

A message will be displayed on the successful submission of the form mentioning the transaction ID and acknowledgement receipt number.

When to File Form -10E

It is necessary to file Form 10E prior to submitting an income tax return. The tax department may send notice if a return is filed, but Form 10E is not filed, and relief under section 89(1) is claimed.

Form 10E at a Glance

Form 10E has seven parts:

1. Personal Information- PAN and Contact Details
2. Annexure I (Arrears) - Salary / Family Pension received in arrears
3. Annexure I (Advance) - Salary / Family Pension received in advance
4. Annexure II & IIA (Gratuity) – Payment in nature of Gratuity in respect of past services
5. Annexure III (Compensation) – Payment in nature of compensation from the employer or previous employer at or in connection with termination of employment after continuous service of not more than 3 years or where the unexpired portion of term of employment is also not less than 3 years.
6. Annexure IV (Pension) – Payment in commutation of pension
7. Declaration

Based on the nature of amount received, appropriate annexure needs to be selected while filing Form 10E.

Things kept in mind while claiming Relief U/S 89(1)

1. It is necessary to submit Form 10E online. An income tax department non-compliance letter will be sent to all taxpayers who sought relief in the prior fiscal year but did not finish Form 10E
2. File Form 10E before to filing of Income Tax Return.
3. Form 10E has to be submitted online and no copy is required to be attached along with tax return. 
4. employer may request proof of receipt of Form 10E; however, this form is not required to be submitted to the employer.

Example 

Mr Anuj has a total income of Rs. 6,00,000/- for Financial Year 2018-19 (Assessment Year 2019-20) and received arrears of Rs. 1,50,000/- for Financial Year 2012-13 (Assessment Year 2013-14). The total income for Financial Year 2012-13 is Rs. 2,00,000/-

The relief will be calculated as follows:

• Tax on total income of Rs. 7,50,000/- (Rs. 6,00,000+Rs. 1,50,000) including arrears for F.Y. 2018-19 is Rs. 64,375/- (as per rates applicable for F.Y. 2018-19 i.e. A.Y. 2018-19).
• Tax on total income of Rs. 6,00,000/- excluding arrears for F.Y. 2017-18 is Rs. 33,475/-
• The difference between (1) and (2) is Rs. 30,900/- (as per rates applicable for F.Y. 2018-19 i.e. A.Y. 2019-20).
• Tax on total income of Rs. 3,50,000/- (Rs. 2,00,000+Rs. 1,50,000) including arrears for F.Y. 2012-13 is Rs. 17,510/- (as per rates applicable for F.Y. 2012-13 i.e A.Y. 2012-13).
• Tax on total income of Rs. 2,00,000/- excluding arrears for F.Y. 2012-13 is Rs. 2,060/- (as per rates applicable for F.Y. 2011-12 i.e A.Y. 2013-14).
• The difference between (4) and (5) is 15,450/-
• The amount of relief will be Rs. 15,450/- [excess amount of (3) over (6)]