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How to Claim Tax Relief on Salary Arrears Under Section 89?

Discover the essential steps to claim salary arrears tax* relief under Section 89. Unearth the significance of Form 10E in this process and avoid potential pitfalls. Learn how to navigate the intricacies of tax filing to secure the benefits you rightfully deserve. 

Ever received a belated bump in your salary or a long-awaited bonus, only to find a big chunk taken away by taxes*? Do not worry! A little-known trick called Section 89 can help you get some of that money back.
 

Think of Section 89 as a special rule in the tax book, like a hidden shortcut to save your hard-earned cash. But it is often a mystery to most people. 
 

As a taxpayer in India, you must know the tax exemptions under Section 80C. However, you must also know the tax relief available under Section 89. 
 

This blog will help you learn about Section 89. We will also show you a step-by-step process on how to use it to get the tax rebate that you deserve. 
 

So, prepare yourself for a much-needed journey into the world of tax benefits you did not even know you had access to.

What are Salary Arrears?

Salary arrears encompass any unpaid earnings from a prior period settled in a subsequent assessment year. This could arise from delayed adjustments in salary revisions or retrospective increments. 
 

Consequently, the payment disparity during the following period is categorised as salary arrears. Employers typically itemise this on payslips and include it in Part B of Form 16.

Taxability of Salary Arrears

When filing your Income Tax Return (ITR), it is important to understand how salary arrears are treated. They are considered part of your overall salary income and are taxable in the year you receive them. 
 

However, there might be concerns about paying taxes at a higher rate, especially if you find yourself in a higher tax bracket or if there have been changes in applicable slab rates. In such scenarios, taxpayers can seek tax refund under Section 89(1).
 

For instance, let us take the case of Anjali. Her monthly salary is ₹50,000. In April 2022, her employer increased her salary to ₹60,000, retroactively effective from March 2022. Since the salary for March 2022 had already been paid, the additional ₹10,000 was disbursed in April 2022, resulting in what is known as Salary Arrears.

How to Claim Relief under Section 89

 

 

If you receive any portion of your salary belatedly or in advance or obtain profits instead of salary, you can claim tax relief under Section 89(1) of the Income Tax Act.
 

When your total income encompasses past salary paid in the present financial year, and the tax slab rates differ between the years, this can potentially result in a higher tax liability. 
 

Therefore, Section 89(1) prevents any undue burden on the taxpayer due to delayed income.
 

In order to ensure fairness, employers calculate the relief under Section 89(1) and document it in Part B of Form 16. 
 

Subsequently, employees can claim this relief by filing Form 10E on the income tax website. This mechanism serves as a safeguard, ensuring taxpayers are not unfairly penalised for the timing of their income.
 

However, to be eligible for income tax relief under Section 89(1), an employee must meet specific criteria, including:
 

  • Receiving salary in arrears or in advance.

  • Receiving salary for more than 12 months in a single financial year, including earnings carried forward from the previous year..

  • Obtaining family pension in arrears.

  • Receiving gratuity.

  • Obtaining compensation upon termination of employment.

  • Receiving commuted pension.

It is crucial to understand that relief can only be claimed if the tax liability is higher due to receiving these arrears. If no additional tax liability is incurred, claiming relief is not possible.

Step-by-Step Guide to Claim Tax Relief under Section 89

  • Step 1: Begin by calculating the tax for the current year, including the arrears in your total income (the year you received the salary arrears).

  • Step 2: Next, compute the tax for the current year but without including the arrears in your total income.

  • Step 3: Find the difference between the tax amounts from Steps 1 and 2, which we will denote as 'X'.

  • Step 4: Calculate the tax due for the year the arrear salary was originally scheduled, including the arrears in your total income.

  • Step 5: Similarly, determine the tax for that same year, but this time, without including the arrears in your total income.

  • Step 6: Once again, find the difference between the tax amounts from Steps 4 and 5, which we will call 'Y'.

  • Step 7: Finally, subtract 'Y' (from Step 6) from 'X' (from Step 3) to arrive at the relief amount. This is the amount you can claim under Section 89.
     

Let us understand the steps better with an example:
 

Suppose Raj, an employee, receives a salary arrear of ₹50,000 in 2023. This arrear pertains to the financial year 2020-21 (Assessment Year 2021-22).
 

  • Step 1: Calculate Tax with Arrears Included (Current Year)

    Raj calculates his total income for 2023, including the ₹50,000 arrear.

    Let us say his total tax liability is ₹15,000.

  •  

  • Step 2: Calculate Tax without Arrears (Current Year)

    Raj recalculates his total income for the year 2023, excluding the ₹50,000 arrears.

    His total tax liability without the arrear is ₹14,000.

  •  

  • Step 3: Find the Difference (X)

    The difference between the two tax amounts is ₹15,000 - ₹14,000 = ₹1,000 (denoted as 'X').
     

  • Step 4: Calculate Tax for Original Year with Arrears (Year of Arrear)

    Raj then returns to the financial year 2020-21, when the arrear was originally due, and includes the ₹50,000 arrear in his total income.

    Let us assume his tax liability for that year is ₹12,000.

  •  

  • Step 5: Calculate Tax for Original Year without Arrears (Year of Arrear)

    In this step, Raj recalculates his total income for 2020-21, excluding the ₹50,000 arrear.

    His tax liability without the arrear is ₹11,500.

  •  

  • Step 6: Find the Difference (Y)

    The difference between the tax amounts for the original year is ₹12,000 - ₹11,500 = ₹500 (denoted as 'Y').

  •  

  • Step 7: Determine Relief Amount

    Finally, Raj subtracts 'Y' from 'X': ₹1,000 - ₹500 = ₹500.

    Raj is eligible for a relief amount of ₹500 under Section 89.
     

This relief ensures that Raj does not face additional tax liability due to his delayed salary arrear receipt. 
 

Therefore, this process helps balance out the tax treatment, providing fair treatment to taxpayers.

The Role of Form 10(E) in Tax Relief Claim Under Section 89

Form 10E is a crucial document for taxpayers seeking relief under Section 89. It serves as an official declaration of arrear income and assists in the calculation of tax relief. 
 

Here are the key features of Form 10E:
 

  • Arrear Income Declaration: Form 10E allows taxpayers to declare any arrear income received during the current financial year, specifying the nature of the income (e.g., salary, family pension, etc.).

  • Calculation of Tax Relief: The form facilitates the computation of additional tax liability arising from the receipt of arrears. It helps determine the precise relief amount eligible for a claim under Section 89.

  • Assessment Year Details: Taxpayers provide information about the relevant assessment year(s) for which they claim relief. This ensures that the relief is applied to the correct tax period.

  • Personal Information: The form requires details like the taxpayer's name, address, PAN (Permanent Account Number), and other relevant personal information.

  • Nature of Arrear Income: Taxpayers need to specify the nature of the arrear income, distinguishing between salary arrears, family pension arrears, or other forms of arrear payments.

  • Tax Computation in Two Scenarios: Form 10E assists in computing the tax payable in two scenarios: one, including arrear income, and the other, without it. This helps in determining the differential tax liability.

  • Relief Computation: The form calculates the actual relief amount by subtracting the tax liability computed without the arrear income from the tax liability calculated, including arrears.

  • Verification and Signatures: Taxpayers must verify the information provided in the form. This may involve self-attestation and signature to confirm the accuracy of the details.

  • Supporting Documentation: While not part of the form itself, taxpayers may need to attach supporting documents like salary slips, Form 16, and any other relevant proofs to substantiate their claim for relief.

  • Submission to Tax Authorities: Form 10E is submitted to the appropriate tax authorities, typically through the income tax department's official channels. This can often be done electronically.

  • Record Keeping: Taxpayers should retain a copy of Form 10E and any supporting documents as proof of their claim for relief. This documentation may be required for future reference or audit purposes.

By providing a structured format for declaring arrear income and calculating tax relief, Form 10E streamlines the process for taxpayers, ensuring accurate and fair treatment for their delayed income.

Filing Form 10E: An Easy Guide

Form 10E is the designated document for reporting income received under section 192(2A). To claim relief under section 89(1) for salary arrears, it is now mandatory to fill out this form prior to filing your income return.
 

Follow these simple steps to complete Form 10E:
 

  • Step 2: Locate and click the 'Login' button at the top-right corner. Provide the required details:

  • User ID (PAN/AADHAR No.)

  • Password

  • Step 3: Once logged in, navigate to the 'E-file' tab and select 'Prepare and submit the online form' from the drop-down menu.

  • Step 4: In the 'FORM NAME' drop-down list, find and choose Form 10E.

  • Step 5: Specify the assessment year and click the 'Continue' button.

  • Step 6: Select the relevant items from the list of annexures.

  • Step 7: Review your personal details and click the 'save' button to retain your selected annexure.

  • Step 8: Enter the total income, including the arrear amount.

  • Step 9: Double-check the entered information for accuracy. Click 'save' and proceed with the filing process.
     

Following these steps ensures you accurately complete Form 10E, enabling you to claim rightful relief under section 89(1) for any salary arrears. 
 

Remember, this form must be submitted before filing your income return.

Important: Non-Filing of Form 10E Could Affect Tax Relief Claim

To avail of the tax relief provided by Section 89(1) of the Income Tax Act, filing Form 10E is imperative. Failure to do so may result in the disallowance of your claim.
 

It is crucial to note that the Income Tax Department mandates the submission of Form 10E for taxpayers seeking benefits under Section 89(1). If you have not filed this form but still claimed relief under 89(1) while filing your return, your ITR may still be processed, but the relief will not be granted. In such cases, you can expect an official notice from the Income Tax Department.
 

To avoid any complications, ensure that Form 10E is submitted before filing your income return. This step is essential to secure the rightful relief you are entitled to under Section 89(1).

Conclusion

If you are a taxpayer in India, you must understand the provisions under various crucial sections like Section 80C and Section 89 of the Income Tax Act. Understanding and properly utilising Section 89(1) and Form 10E can make a significant difference in managing tax liabilities, especially regarding salary arrears. This provision is a crucial safeguard for taxpayers, ensuring they receive fair treatment for delayed income. 
 

By following the step-by-step process outlined in this guide, individuals can accurately calculate and claim relief, ultimately saving on tax payments.
 

Remember, the mandatory filing of Form 10E is not a mere bureaucratic formality; it is the key to unlocking the benefits of Section 89(1). Neglecting this step could lead to the disallowance of your claim and potential notices from the Income Tax Department. 
 

Stay vigilant and proactive in complying with these regulations to secure the financial advantages you rightfully deserve.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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FAQs

Why is it important to file Form 10E for claiming tax relief under Section 89(1)?

Filing Form 10E is crucial because it is the designated document for reporting arrear income under Section 192(2A). The Income Tax Department mandates its submission before claiming relief under Section 89(1). 

 

Neglecting to file this form could lead to the disallowance of your relief claim, potentially resulting in notices from the tax authorities. By adhering to this requirement, you ensure that you receive fair treatment for delayed income and avoid complications during the tax filing process.

Can I file Form 10E after submitting my income tax return?

Yes, you can. If you have already filed your income tax return but omitted to submit Form 10E for claiming relief under Section 89(1), you can rectify this by filing an online revised return. 

 

Make sure to include the necessary details in Form 10E and submit the revised return before the deadline. This way, you can still avail the rightful relief you are entitled to for your arrear income. Remember that revised returns can only be filed within a specified timeframe.

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  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

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