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

Written by: CHETNAA GOYAL Posted on: 9 April, 2023

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.