Section 89 (1) of Income Tax Act provides some tax relief on arrears of salary. Basically section 89(1) introduced to resolve the issue of paying higher tax in the year in which arrears of salary received.
Because
when you receive an arrear of salary along with your current year salary, your
total income for that year increases and ultimately you have to pay higher
taxes.
So,
in the year when you received arrears of salary, your tax burden suddenly
increased. Keeping in mind about this issue, the government had introduced the
tax relief on arrears of salary.
In the following paragraphs we have explained how to calculate arrears of salary to get reliefs on arrears of salary under section 89 (1):
What is Section 89 (1) of Income Tax Act?
Section 89 (1) introduced
to provide tax relief to taxpayers on receipt of arrears of salary.
Sometimes,
individuals get the salary of the current year along with past due arrears.
Usually it happens with government employees, where the government increases
the salary retrospectively and pays the past arrears of salary along with
current year salary.
So,
Section 89 (1) helps the individual to get tax reliefs on arrears of salary.
Example
A
person is receiving salary in the following manner:
- FY 2018-19 Rs. 120,000
- FY 2019-20 Rs. 120,000
- FY 2020-21 Rs. 150,000 (Rs. 130000 current year salary and Rs.20000 arrear of salary for FY 2018-19 Rs. 10000 & FY 2019-20 Rs.10000)
So
here employee receives the salary in FY 2020-21 of amount equals to Rs. 150,000
(i.e. Rs. 130,000 for FY 2020-21 and Rs. 10,000 each for FY 2018-19 and FY
2019-20).
So
here Rs. 10,000 each of the Year 2018-19 and 2019-20 is regarded as arrears of
salary.
Now
the point to be noted is that arrears of salary also cover under the tax
provisions. You have to pay tax on arrears in the year in which it is received.
In
the current financial year in which you receive the arrears, you have to pay
higher tax because now you are getting arrears along with the current year
salary.
But
here the point to worry is that suppose if you received arrears amount in the
years to which it relates and not in the current financial year, you may save
the huge tax but now as the arrears received in the current year you have to
pay tax in current year only.
Like
in the above example, suppose instead of getting arrears in FY 2020-21 if you
get arrears of Rs. 10,000 each in the year 2018-19 and 2019-20 only, then you
may fall in lower tax brackets and may save tax.
So
to resolve this problem the government introduced Section 89 (1) for giving
relief from tax burden in the current years due to receiving arrears of salary.
Also Read: Section 44AA: Rules & Limit for Maintenance of Books of Accounts
How to calculate tax relief on arrears of salary under Section 89 (1)?
If
you have received arrears of salary for previous years then you can get tax
relief under section 89 (1) of Income Tax Act.
By
availing tax relief you can save huge tax and you don't have to bear the burden
of tax on payment of arrears of salary. But remember tax relief will be
received only if you follow the proper procedure, which will be discussed in the
article.
Before
calculating the amount of tax relief you should carry the following common
documents:
- Arrears of salary statement (received from your employer)
- ITR’s of the year in which arrears relates
- Salary detail
- Form 16B
For
calculating tax relief under Section 89 (1) you have to follow the following
seven steps:
Step 1
Calculate
tax payable on total income of the current year (including arrears salary) by
using the tax rates of the current financial year in which arrears are
received. (You can get the arrear amount from statement given by your employer)
Step 2
Calculate
tax payable on total income of the current year (excluding arrears salary) by
using the tax rate of the current financial year in which arrears are received.
Step 3
Calculate
difference between step 1 and step 2. The amount comes is the amount of tax
liability arises on arrears salary in the current year.
Step 4
Calculate
tax payable on total income of the year in which arrear of salary relates
(including amount of arrear salary) by using tax rates of the year to which
arrear relates.
Step 5
Calculate
tax payable on total income of the year in which arrear of salary relates
(excluding amount of arrear salary) by using tax rates of the year to which
arrear relates.
Step 6
Calculate
difference between step 4 and step 5. The amount comes is the amount of tax
liability on arrear salary in the year to which it relates.
Step 7
Now
if tax liability in step 3 is more than tax liability in step 6, then the
difference between step 3 and step 6 is the tax relief.
If amount in step 6 is more than step 3, (it means, if you receive the arrear in the past year only instead of current year, now you are covered under lower tax bracket and hence to pay less tax), then in such a case no such relief will be received.
Example: for calculate tax relief on arrears of salary under Section 89 (1)
Mr.
A is a government employee whose age is 42 years. His total income of FY
2020-21 is Rs. 925000 (including the amount of arrear salary)
He
also receives arrears of amount Rs. 90000 of FY 2012-13 in FY 2020-21.
His
total income for FY 2012-13 is Rs. 440000 (excluding arrears of salary). This
Rs. 440000 is checked from ITR of FY 2012-13. He wants to compute relief under
Section 89 (1). He is opting for an old tax Regime for FY 2020-21.
Tax Rate for residents having
age below 60 years is as under:
|
FY 2012-13 |
|
|
Upto
Rs.200000 Rs.
2 Lacs to Rs. 5 Lacs Rs.
5 Lacs to Rs. 10 Lacs Above
Rs.10 Lacs CESS |
NIL 10% 20% 30% 3% |
|
FY 2020-21 (old tax regime) |
|
|
Upto
Rs.250000 Rs.
2.50 Lacs to Rs. 5 Lacs Rs.
5 Lacs to Rs. 10 Lacs Above
Rs.10 Lacs CESS |
NIL 5% 20% 30% 4% |
Solution:
For
computing relief Mr. A has to follow the following steps:
Step 1
Computing
tax payable on total income of FY 2020-21 (including arrears salary) by using
tax rates of FY 2020-21.
|
Particular |
Amount Rs. |
|
Total Income for FY 2020-21 (including arrears
of salary) Tax on total income Upto Rs. 2.5 Lacs =
Nil Rs. 2.50 Lacs to Rs.
5 Lacs = Rs. 12500 Balance Rs.4.25 Lacs
= Rs.85000 Total Tax = Rs.
97500 (+) Cess 4% = Rs.
3900 Tax Payable |
925000 101400 |
Step 2
Computing
tax payable on total income of FY 2020-21 (excluding arrear salary) by using
tax rate of FY 2020-21
|
Particulars |
Amount Rs. |
|
Total income for FY.2020-21 (including arrear
of salary) (-) Arrear salary of
FY 2012-13 |
925000 (90000) |
|
Total Income for FY 2020-21 (excluding arrear
of salary) Tax on Total Income of Rs. 835000 Upto Rs. 2.5 Lacs =
Nil Rs. 2.50 Lacs to Rs.
5 Lacs = Rs. 12500 Balance Rs.3.35 Lacs
= Rs.67000 Total Tax = Rs.
79500 (+) Cess 4% = Rs.
3180 Tax Payable |
835000 82680 |
Step 3
Difference
of tax payable in step 1 and step 2
=
Rs. 101400 – Rs. 82680
=
Rs. 18720 is the tax on arrear of salary in FY 2020-21
Step 4
Compute
tax payable on total income of FY 2012-13 (including arrear of salary) by using
tax rates of FY 2012-13.
|
Particulars |
Amount Rs. |
|
Total income for FY.2012-13 (excluding arrear
of salary) (+) Arrear salary of
FY 2012-13 |
440000 90000 |
|
Total Income for FY 2012-13 (including
arrear of salary) Tax on Total Income for FY 2012-13 Upto Rs. 2.0 Lacs =
Nil Rs. 2.00 Lacs to Rs.
5 Lacs = Rs. 30000 On Balance Rs. 30000
= Rs. 6000 Total Tax = Rs.
36000 (+) Cess 3% = Rs.
1080 Tax Payable |
530000 37080 |
Step 5
Compute
tax payable on total income of FY 2012-13 (excluding arrear of salary) by using
tax rates of FY 2012-13.
|
Particular |
Amount (Rs.) |
|
Total Income of FY 2012-13 (excluding arrear
of salary) Tax on Total Income for FY 2012-13 Upto Rs. 2.0 Lacs =
Nil Balance Rs.2.40 Lacs
= Rs.24000 Total Tax = Rs.
24000 (+) Cess 3% = Rs.
720 Tax Payable |
440000 24720 |
Step 6
Difference
of tax payable in step 4 and step 5
=
Rs. 37080 – Rs. 24720
=
Rs. 12360 is the tax on arrear of the year to which the arrear relates.
Step 7
So
here the amount in step 3 is greater than the amount in step 6. So Mr. A is
eligible for availing relief.
Relief
under section 89(1) (calculated in Step 3 - Step 6)
=
Rs. 18720 – Rs. 12360
=
RS. 6360
Hence
tax liability of FY 2020-21 will be calculated after availing relief for Rs.
6360.
|
Particular |
Amount Rs. |
|
Tax payable Step 1 Less: Relief under section 89(1) |
101400 (6360) |
|
Tax liability for FY 2020-21 |
95040 |
Also Read: Section 80GG: Eligible Deduction for Rent Paid
What is form 10E for availing relief under section 89(1)?
Form
10E is mandatory to file if you want to avail relief benefits under Section 89
(1) in order to save tax.
Without
filing the form 10E you cannot avail relief. Even if you fill the relief amount
in ITR, but do not fill form 10E, then your relief will be rejected and may
also receive a notice from income tax department intimating that relief is not
allowed in your case.
So it is mandatory to fill form
10E first and then can claim relief under Section 89 (1).
In
Form 10E, you have to fill in details like your total income, arrear of salary
details etc. Even if you received arrears salary/ family pension, advance salary,
gratuity, compensation, pension commutation the same form 10E is required to
fill.
How to fill form 10E online for claiming relief under section 89(1)?
For
claiming benefit of Section 89 (1) and availing relief on arrear of salary, it
is mandatory to fill form 10E. Form 10E can be filled online, on the Income Tax
portal. For filing form 10E you have to follow the following steps:
Step 1
Visit
the Income Tax portal website and login with your ID and password.
Step 2
After
login you will see the e-file tab in the menu bar. Click on the e-file.
Step 3
After
the e-file option, click on income tax forms.
Step 4
A
screen will appear with three options:
Person
having business / professional income
Person
not having any business / profession income
Other
(source of income not relevant)
Select
one from above as applicable in your case and then click Form 10E.
Step 5
Thereafter
select assessment year and then click on continue. A screen will appear, where
“let's get started” is written, you have to click on it.
Step 6
Then
you have to select the items for which you want to claim relief. Like arrears
salary / family pension, advance salary, gratuity, compensation pension,
commutation.
Steps 7
Thereafter
a screen shall appear and you have to fill in certain information like personal
information, arrears salary details etc.
Step 8
After
filing all details in form 10E, proceed to e-verify. Before e-verify if you
want to preview your form 10E, then you can click on the preview button and
then proceed to e-verify.
Step 9
After
e-verify, a successful submission message will show on your screen, with the
Transaction ID and acknowledgement receipt number. Now you can claim benefits
for your arrears of salary.
Also Read: Section115BBE (Taxability of Undisclosed / Unexplained Income)
Summary
Section 89 (1) of Income tax
Act
provides relief on arrears of salary. By claiming such relief you can save some
tax. But remember you can avail benefits of relief only if you have filed the Form 10E on Income Tax portal.