Section 89(1) Relief on Salary Arrears and Salary in Advance

Relief is provided under section 89(1), if salary pertaining to another period is received in advance/ or in arrears during a financial year, leading to additional tax liability.

• What is meant by Salary Arrears?

Arrears refer to “money that is owed and should have been paid earlier”. Salary received now for an earlier period is called salary from arrears.

• Taxability of Salary Arrears/Advance and Relief under section 89(1)

Tax is calculated on the total income earned / received during the year. If the total income includes any past dues paid in the current year, it may happen that one has to pay higher tax on such arrears or advance due to change in tax slab.

The Income Tax Act, allows a relief under section 89(1) from any additional tax burden due to delayed receipt of income i.e. one does not have to pay additional taxes due to delay in payment, if a lower tax bracket was applicable in the relevant year.

• Calculation of Relief under section 89(1)

1. Calculate tax payable on total income (INCLUDING additional salary) in the year it is received. Arrears/Advance provided will reflect in Part B of Form 16
2. Calculate tax payable on the total income (EXCLUDING additional salary) in the year it is received.
3. Calculate additional tax liability created due to arrears of income i.e. calculate the difference between Step 1 and Step 2.
4. Calculate tax payable on the total income of the year to which the arrears relate, INCLUDING arrears
5. Calculate tax payable on the total income of the year to which the arrears relate, EXCLUDING arrears.
6. Calculate the difference between Step 5 and Step 4 i.e. additional tax amount had the arrears were received during the relevant year itself.
7. Tax Relief = Excess of Step 3 over Step 6. No relief shall be provided if amount in Step 6 is more that in Step 3.

• Example: Mr. Rahul has a total income of Rs. 6,00,000 for FY 2018-19 (AY 2019-20) and received arrears of Rs. 1,50,000 for FY 2011-12 (AY 2012-13). The total income for FY 2011-12 is Rs. 2,00,000. The relief will be calculated as follows:

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

• Compliances to Claim Relief under section 89(1)

Filing of Form 10E to claim relief u/s 89(1) is mandatory before filing the income tax return. The form can be filled online through https://www.incometaxindiaefiling.gov.in/home.

• Consequences of not filing Form 10E

Taxpayers who have claimed relief under section 89(1) but have not filed Form 10E have received an income tax notice from the tax department with the following lines –

The relief u/s 89 has not been allowed in your case, as the online form 10E has not been filed by you. The furnishing of Online form 10E is required as per Sec.89 of the Income Tax Act.

• Exceptions to this section

No such relief can be availed in respect of the amount received by the tax payer on his voluntary retirement or termination of service if an exemption in respect of the same has been claimed otherwise by the tax payer under some other provision. Gratuity received for past services, payment received in commutation of pension, etc are also eligible for the purposes of said relief, subject to certain conditions.

Authored by – CA Anushka Saraogi

TDS on Income from Pension