How to calculate relief for salary arrears under Section 89(1) and how to claim it

The Income-Tax Act allows relief under Section 89(1) to reduce the impact of additional tax liability arising from the receipt of salary arrears.

How to calculate relief for salary arrears under Section 89(1) and how to claim it
In order to claim relief under Section 89(1), you are required to submit Form No. 10E.

As a salaried employee, you may receive some arrears or advances that are taxable in the year they are received. This may include salary arrears, advance salary, family pension arrears, commuted pension, any compensation on termination of employment, and gratuity (gratuity portion which is not exempt under Section 10), to list just a few.

If you receive any such amount in a current year, it will have a subsequent impact on gross salary, leading to a significant jump in tax liability. Consequently, this will push you to a higher income tax slab.

Hence, the Income-Tax Act allows relief under Section 89(1) to reduce the impact of additional tax liability arising from the receipt of salary arrears.

The important precondition is that relief under Section 89(1) can be claimed if the tax payable is higher after receiving such arrears. In case there is no additional tax liability, relief is not allowed.

Steps to claim relief of Salary arrears under Section 89(1)

Let’s understand the steps involved to calculate relief from salary arrears under Section 89(1), citing an example.

Vinod’s (non-senior citizen) net taxable income is Rs 12,00,000 in the financial year (FY 2021-22). He received salary arrears of Rs 3,00,000 from the financial year (FY 2012-13), and his net taxable income in FY 2012-13 was Rs 8,00,000 (including arrears).

To compute the relief under Section 89(1), find out the tax liability for FY 2021-22 and for FY 2012-13.

Note: The total income is taxable income after claiming all the exemptions and deductions.

Tax liability for FY 2021-22

Step-1: Calculate salary inclusive of arrears.

Total Taxable income : Rs 12,00,000 + Rs 3,00,000 = Rs 15,00,000

Income tax: Rs 2,62,500

Cess: Rs 10,500

Total tax liability = Rs 2,73,000

Step-2: Calculate salary without arrears

Total income: Rs 12,00,000

Income tax: Rs 1,72,500

Cess: Rs 6,900

Total tax liability = Rs 1,79,400

Step-3: Difference between Tax at Step-1 and Tax at Step-2

Rs 2,73,000 – Rs 1,79,400 = Rs 93,600

Tax liability for FY 2012-13

Step-4: Calculate salary inclusive of arrears

Total income: Rs 8,00,000

Income tax: Rs 90,000

Education cess: Rs 2,700

Total tax liability: Rs 92,700

Step-5: Calculate the salary without arrears

Total income: Rs 5,00,000

Income tax: Rs 30,000

Education cess: Rs 900

Total tax liability: Rs 30,900

Step-6: Difference between tax at Step-4 and tax at Step-5

Rs 92,700 – Rs 30,900 = Rs 61,800

Step-7: Relief under Section 89(1): Step-3 minus Step-6

Rs 93,600 – Rs 61,800 = Rs 31,800

Step-8: Tax payable:

Tax at Step-1 minus Relief under Section 89(1)

Rs 2,73,000 – Rs 31,800

= Rs 2,41,200

How to Claim Relief under Section 89(1)

In order to claim relief under Section 89(1), you are required to submit Form No. 10E. Online filing of Form No. 10E is mandatory. You basically need to mention the particulars of your income received in a particular financial year, including arrears or advances, if any.

Form No. 10E is required to be filed prior to filing your tax return. You also need to ensure that you choose Annexure-1 for salary arrears.

(The author is Founder and CEO, Clear)

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