written by Khatabook | July 1, 2021

Claiming Relief under Section 89(1) on Salary Arrears

The tax relief under section 89 of the Income Tax Act can help taxpayers get relief from the burden of extra taxes on receiving arrears. However, you can take this benefit only if your tax liability increases due to receiving arrears, and otherwise, the tax liability would have been normal in the current year. If there is no increase in liability due to the conditions mentioned below, you cannot take the benefit of relief. You need to submit a 10E Form to get relief from the increase in taxes. 

What is Tax Relief Under Section 89(1)

  • As the arrears of salary are taxable, so the employee has an option to claim the benefit of relief u/s 89
  • It may happen that if the arrears of salary are taxed in the year to which they belong, the tax might be lower than the tax paid on such arrears. Section 89 intends to provide relief in these circumstances

Conditions for Claiming Relief under Sections 89(1) 

Relief under section 89 is available in the following cases:

  1. When the salary received from the employer are in arrears or in advance
  2. When the salary received from the employer in one financial year amount to the salary for more than 12 months
  3. When the family pension received is in arrears
  4. Gratuity receivable or received
  5. When the employer compensates the employee on termination of employment
  6. When the employee receives commuted pension

What Are Arrears of Salary?

  • In some cases, the employer may increase the salary of employees with a retrospective effect. It means the increased salary applies from an earlier date. The employer pays the increase in salary for the earlier period, during the current year. The increased salary paid to the employee is called arrears.
  • Arrears of salary are taxable in the year in which the employees receive them.
  • For example - Richa is earning a salary of Rs. 20,000 per month. On 1/05/2020, the employer has increased the salary of Richa to Rs. 25,000 p.m. with effect from 1/01/2020. 
  • In the following case, Richa will receive a total salary of Rs. 3,15,000 during P.Y. 2020-21. But, Rs. 15,000 belongs to the salary for P.Y. 2019-20. In other words, Rs 15,000 comes under arrears of salary. 

Steps For Calculation of Relief Under Section 89(1) of Income Tax Act

Use the following steps for calculating the relief u/s 89(1) as mentioned below:

  1. STEP 1- Calculate tax liability for the year in which you receive such arrears, including the amount of arrears.
  2. STEP 2- Subtract the amount of such arrears from the tax liability for the year in which you receive such arrears. 
  3. STEP 3- Calculate the difference between STEP 1 & STEP 2. The difference you obtain is the tax on such arrears for the year in which you actually received it.
  4. STEP 4- Calculate tax liability for the year to which arrears of salary belong, including the amount of such arrears.
  5. STEP 5- Calculate tax liability for the year to which arrears of salary belong, excluding the amount of such arrears.
  6. STEP 6- Calculate the difference between STEP 4 & STEP 5. The difference so obtained is the tax on such arrears for the year to which such arrears belong. 
  7. STEP 7- Calculate the difference between STEP 3 & STEP 6. The resulting figure is the amount of tax relief u/s 89(1).

How To Calculate Income Tax On Arrear Salary

Let's take a practical example of calculating income tax on arrears of salary

Suppose Mr Nitesh, an employee, gives the following details for the PY 2020-21.

PARTICULARS

 AMOUNT  (in Rupees)

Salary income 

                          7,25,000

Salary for FY 2009-10 received during FY 2020-21

                         80,000

Assessed income for FY 2009-10

                       2,40,000

 

In the given example, you have to calculate the tax liability as per the slab rates applicable to the financial year.

PARTICULARS

AMOUNT  (in Rupees)

AMOUNT  (in Rupees)

Assessment Year 2021-22

   

Total Income ( including arrears)

 

                                   8,05,000

Total Income ( excluding arrears)

 

                                   7,25,000

Tax on total income of Rs. 8,05,000

                                73,500

 

Add: Health & Education Cess @ 4%

                                 2940

 

Tax on total income ( including arrears) (A)

 

                                    76,440

Tax on total income of Rs. 7,25,000

                                57,500

 

Add: Health & Education Cess @ 4%

                                2,300

 

Tax on total income ( excluding arrears) (B)

 

                                   59,800

Difference between (A) & (B) - (1)

 

                                   16,640

Assessment Year 2010-11

   

Total Income ( including arrears)

 

                                  3,20,000

Total Income ( excluding arrears)

 

                                  2,40,000

Tax on total income of Rs. 3,20,000

                                18,000

 

Add: Health & Education Cess @ 3%

                                  540

 

Tax on total income ( including arrears) (C)

 

                                  18,540

Tax on total income of Rs. 2,40,000

                                 8,000

 

Add: Health & Education Cess @ 3%

                                  240

 

Tax on total income ( excluding arrears) (D)

 

                                    8,240

Difference between (C) & (D) - (2)

 

                                   10,300

Relief u/s 89 (1 - 2)

 

                                    6,340

 

Tax payable for PY 2020-21 = Rs. 76,440 - Rs. 6,340 = Rs. 70,100

Also Read: Salary Calculator 2020-21 - Take Home Salary Calculator India

Notes

An explanation for the table above to calculate relief u/s 89

1. Calculate Total income including and excluding arrears for the Assessment year 2021-22.

Income (inclusive of arrears) = 7,25,000 + 80,000 = 8,05,000

Income (exclusive of arrears)= 7,25,000

2. Calculate Tax liability on Rs. 8,05,000.

Particulars 

Amount

0 - 2,50,000

Nil

2,50,000 - 5,00,000 @ 5%

12,500

5,00,000 - 8,05,000 @ 20% 

61,000

Total 

73,500

Health and Education Cess @ 4%

2,940

Total Tax

76,440


 

3. Calculate Tax liability on Rs. 7,25,000.

Particulars 

Amount

0 - 2,50,000

Nil

2,50,000 - 5,00,000 @ 5%

12,500

5,00,000 - 7,25,000 @ 20% 

45,000

Total 

57,500

Health and Education Cess @ 4%

2,300

Total Tax

59,800

4. Difference of point 2 and 3 i.e. 76,440- 59,800 = 16,640

5. Calculate Total income including and excluding arrears for the Assessment year 2010-11.

    Income ( including arrears)= 2,40,000 + 80,000 = 3,20,000

    Income (excluding arrears) = 2,40,000

6. Calculate Tax liability on Rs. 3,20,000

Particulars 

Amount

0 - 1,60,000

Nil

1,60,000 - 3,00,000 @ 10%

14,000

3,00,000 - 3,20,000 @ 20% 

4,000

Total 

18,000

Health and Education Cess @ 3%

540

Total Tax

18,540

7. Calculate Tax liability on Rs. 2,40,000

Particulars 

Amount

0 - 1,60,000

Nil

1,60,000 - 2,40,000 @ 10%

8,000

Total 

8,000

Health and Education Cess @ 3%

240

Total Tax

8,240

8. Difference of point 7 and 8 = 18,540 - 8,240= 10,300

9. Relief u/s 89 = point 4 - 8 = 16,640 - 10,300= 6,340

10E FORM Filing 

If you want to claim the benefit of relief u/s 89(1), you must file the 10E Form. You can file it on www.incometaxindiaefiling.gov.in. If you do not file this form, the Income Tax Department will notify you of your ineligibility to claim relief u/s 89(1). 

FEATURES OF FORM 10E

  • Form 10E contains details of the total income of an employee and arrears of salary received.
  • Form 10E can be submitted online on the electronic portal of the Income Tax Department. 
  • The portal displays a form section where you can find Form 10E. Fill the form carefully.
  • The most important thing is to select the correct assessment year. The year in which you receive the arrears is the assessment year.

Steps For Filing The FORM 10E

STEP 1- Visit the portal www.incometaxindiaefiling.gov.in and login into your account. If you are a new user, create a new account.

STEP 2- Go to the tab e-file. Out of the six options available, choose the option Income Tax Forms.

STEP 3 -  The screen will display the Income Tax Forms. Fill in your PAN details and the Form name. Then, in form name, select Form no. 10E Form for relief u/s 89.

STEP 4- In the Assessment Year, select the year for filing the 10E Form. For example, if arrears of salary are collected in the Assessment Year 2021-22 (Financial Year 2020-21), choose Assessment Year as 2021-22. 

STEP 5- Select the submission mode. After filling in the details, press continue.

STEP 6-The window will display some instructions. Read them and click on "Save Draft" to save the form.

STEP 7- Click on Form 10E and fill out the details. 

  • You need to fill in the details like the name and residential address of the employee.
  • Fill up the Permanent Account Number.
  • Choose the residential status of the employee.
  • Arrears or advances of the salary received. 
  • Gratuity payment received for the past services during at least 5 years as per the provisions mentioned.
  • The compensation received from the current or past employer at the end of employment. 
  • Commuted pension received under sub-rule 5 of rule 21A.
  • There are 5 annexures available. Select the annexure you need to fill:
  • 1. Annexure-I - Fill in the details for the arrears and advances of salary.
  • 2. Annexure-II - You need to fill in the details of gratuity for the services of more than 5 years but less than 15 years.
  • 3. Annexure-IIA - You need to fill this if you have received gratuity for services of more than 15 years.
  • 4. Annexure-III - Fill this annexure with the details of compensation received at the end of employment.
  • 5. Annexure-IV - Enter the details of the commutation of pension.

STEP 8- You need to fill Annexure I for claiming the benefit of relief u/s 89(1). In Annexure I, some details need to be filled in as mentioned below:

  • 1. Total income received by the employee. This amount must exclude arrears or advance salary received.
  • 2. Amount of salary arrears or advances received.
  • 3. Add (1) and (2) and fill the total income, including the arrears or advances of the salary received.
  • 4. Calculate the tax on total income as per (3). It means the tax on total salary income, including the arrears.
  • 5. Calculate the tax on total income as per (1). It means the tax on total salary income excluding the arrears.
  • 6. Calculate the difference between (4) and (5). This amount will be the tax on the salary received in arrears or advance.
  • 7. Fill in the tax computed as per "Table A".
  • 8. Calculate the difference between (6) and (7). This amount will be the relief under section 89A.

STEP 9- After filling in the relevant details, you can click on "preview and submit". Now you have submitted your 10E Form

Consequences of Not Filing Form 10E

Form 10E is a simple form for the Calculation of arrears or advances on salary. You can submit the form without needing any deep knowledge. You just need to learn how to calculate it. File the 10E Form before filing the Income Tax Return. If you fail to file the 10E Form before the due date of ITR, the Income Tax Department will send a notice. If you want to claim the benefits of relief, it is a mandatory requirement for filing Form 10E.

Also Read: What Is Gross Salary? Know How To Calculate Gross Salary Or CTC

Conclusion

You should keep in mind that if you receive a VRS, relief under section 89 is available. But if you have claimed the exemption under Sec 10(10C) of the Income Tax Act, no benefit will be provided. You can claim only one exemption. The two can't be clubbed together. The points mentioned above will help in filing the 10E Form. If you still have any confusion, consult any Income Tax expert or a Chartered Accountant. They will help you in the smooth filing of the return.

FAQs

My employer has increased my salary with the retrospective effect. Now, I have to bear the burden of paying extra taxes. What alternative do I have to reduce this burden?

This situation is the case of arrears of salary. In the given case, you can claim the benefit of relief u/s 89(1). You need to file Form 10E for the same. 

What is the 10E Form?

10E Form helps you to claim the benefit of arrears or advance received on salary income. The procedure and the details regarding this form have been mentioned above. 

Is it mandatory to file FORM 10E, or can I skip filing?

To claim the benefit of relief u/s 89, you need to file Form 10E. If you skip this crucial step, you can't avail the benefit.

Where can I file this Form 10E?

Many taxes can be filed online nowadays. You can file this form on the website of the Income Tax Department, https://incometaxindiaefiling.gov.in/

I am facing an issue in calculating the tax liability of the previous years to which the arrears pertain. How should I proceed?

If you are facing difficulties with the slab rates of the earlier years, you can search the slab rates of the given financial year online. You may proceed to calculate the tax liability with those slab rates.

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