Income tax relief for Salary Received in Advance & on Arrears of Salary Received for earlier years
Any income due or received by an employee from his employer or former employer is taxable under the head `salaries’ as per the provisions of the Income Tax Act, 1961. It is pertinent to note that the salary earned in respect of a particular financial year is subject to tax as per the tax rates applicable for that financial year.
There are occasions when an employee may receive income in a particular financial year, which relates to earlier financial years, i.e., as arrears of salary or he may receive certain payments in advance for future financial years, i.e., as advance salary.
In such an event, it is possible that if the entire income is added to the salary income of that financial year, then the tax payer may have to pay tax at a higher rate depending on the slab rates under which his income is otherwise taxable.
In such a case, there is a relief provided under the Act to ensure that the employee is not worse off.
Where a tax payer receives a sum in the nature of salary being paid in arrears or in advance or receives in any financial year salary for more than twelve months or receives profits in lieu of salary or family pension paid in arrears due to which his total income is taxable at a rate more than the rate at which it would otherwise had been taxable then he may claim relief in respect of tax rates. Besides, certain other receipts like gratuity received for past services, compensation received from the employer or former employer on termination of the employment, payment received in commutation of pension, etc are also eligible for the purposes of said relief, subject to certain conditions.
The said relief is to be claimed in the financial year in which the extra payment by way of arrears, advance is taxed. Broadly, the relief under these provisions is arithmetic in nature, as it involves finding out two rates of taxes. The first is the rate of tax applicable to the total income including the extra amount in the year of receipt. Second is finding out the rate by adding the arrears to the total income of the year to which they relate. These all relief is claimed under section 89 of Income Tax Act, 1961.
Exceptions to tax relief
There has been a difference of view whether relief under this provision could be claimed; when the tax payer has also claimed benefit / exemption under some other provision under the Act. It has now been specified that 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.
How to calculate relief under section 89?
1. Calculate tax payable on the total income, including arrears – in the year it is received
2. Calculate tax payable on the total income, excluding arrears – in the year it is received
3. Calculate difference between Step 1 and Step 2
4. Calculate tax payable on the total income of the year to which the arrears relate, excluding arrears
5. Calculate tax payable on the total income of the year to which the arrears relate, including arrears
6. Calculate difference between Step 4 and Step 5
7. Excess of amount at Step 3 over Step 6 is the tax relief that shall be allowed.
Please note that if amount at Step 6 > amount at Step 3, no relief shall be allowed.
Furnishing of particulars for claiming the relief
The tax payer is required to furnish the particulars in respect of the above relief to his employer in the specified form so that the same could be considered in respect of his tax calculations.
This is a beneficial provision in case of payments received by an employee from his employer/former employer for more than one financial year especially when due to these additions, the tax payer’s slab rate moves upward or when there is a variation in tax rates in different financial years. Therefore, when salary/other specified payments are received in arrears or in advance, the benefit could be availed of by the tax payer by paying due attention to the relief provisions as specified above.
Important Note: For claiming relief under section 89(1) for arrears of salary received, it is mandatory to file Form 10E with the Income Tax department. If Form 10E is not filed and relief is claimed, then the taxpayer is most likely to receive notice from Income Tax department for not filing Form 10E.
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(Republished with Amendments by Team Taxguru)