Section 89 (1) & Form 10E for Tax Relief on Arrears of Salary

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.