Relief on Arrears of Salary Under Section 89: A Complete Guide for Taxpayers

Receiving arrears of salary can result in a higher tax liability because it adds to your taxable income in the year of receipt. To mitigate the additional burden, Section 89 of the Income Tax Act, 1961, provides relief. This blog explains how Section 89 works, who can claim relief, and the steps to compute it with examples and FAQs.

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What is Section 89?

Section 89 allows taxpayers to claim relief on arrears or advance salary received during a financial year. This provision ensures fair taxation by redistributing income to the year(s) to which it pertains, avoiding higher tax liability due to increased income in a single year.

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When Can Section 89 Be Claimed?

You can claim relief under Section 89 in the following scenarios:

• Arrears of salary (e.g., increments paid for prior years).
• Advance salary received.
• Gratuity for past services.
• Commutation of pension.
• Family pension arrears.

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How Does Section 89 Work?

To understand Section 89, we need to calculate:

1. Tax payable on the total income, including arrears/advance salary, for the current year.
2. Tax payable on the total income excluding arrears/advance salary for the current year.
3. Tax payable on the total income, including arrears/advance salary, for the year(s) to which the income pertains.
4. Relief is calculated as the difference between these amounts.

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Steps to Claim Relief Under Section 89

1. Break Down the Arrears or Advance Salary: Determine the years to which the income pertains.
2. Calculate Tax for Each Relevant Year: Include arrears in the income of the relevant years and calculate the tax for each year.
3. Compute Relief: Compare tax liabilities and calculate relief as per the difference.
4. File Form 10E: Relief can only be claimed if Form 10E is filed online through the Income Tax e-filing portal.

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Example: Relief Calculation Under Section 89

Scenario:
Mr. Sharma received ₹2,00,000 as arrears for FY 2020-21 in FY 2023-24. His annual income is ₹8,00,000.

Step-by-Step Calculation:

1. Tax in FY 2023-24 Without Arrears: Tax on ₹8,00,000 as per the applicable slab rates.
2. Tax in FY 2023-24 With Arrears: Tax on ₹10,00,000 (₹8,00,000 + ₹2,00,000).
3. Tax for FY 2020-21 Including Arrears: Recompute tax for FY 2020-21 by adding ₹2,00,000 to the income for that year.
4. Tax for FY 2020-21 Without Arrears: Compute tax for FY 2020-21 on the actual income of that year.
5. Relief Under Section 89:
   Relief = (Tax with arrears in FY 2020-21 – Tax without arrears in FY 2020-21) – (Tax with arrears in FY 2023-24 – Tax without arrears in FY 2023-24).

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Filing Form 10E

• Log in to the Income Tax e-Filing Portal.
• Navigate to e-File > Income Tax Forms.
• Select Form 10E and fill in the details for arrears and relevant years.
• Submit the form before filing your income tax return.

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FAQs on Section 89 Relief

1. Can I claim relief for arrears of salary received for more than one year?
Yes, you can claim relief for arrears pertaining to multiple years, provided you calculate tax for each year separately and file Form 10E.

2. Is it mandatory to file Form 10E?
Yes, relief under Section 89 cannot be claimed unless Form 10E is filed.

3. Can relief under Section 89 be claimed for advance salary?
Yes, advance salary is eligible for relief under Section 89.

4. Does Section 89 apply to pension arrears?
Yes, pension arrears, including commuted and uncommuted pensions, are eligible for relief under this section.

5. Is there any deadline for claiming relief?
You must claim relief in the year you receive the arrears or advance salary by filing Form 10E before the ITR filing deadline.

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Key Takeaways

• Section 89 ensures that arrears or advance salary do not unfairly increase your tax liability.
• Relief computation requires recalculating taxes for the relevant years.
• Filing Form 10E is mandatory for claiming relief.

Understanding and utilizing Section 89 can help salaried individuals reduce tax liabilities effectively, ensuring compliance and fair taxation.