Here’s all you need to know about the Relief when salary, etc. is paid in arrears or in advance:
There are cases wherein an employee, may get salary arrears in the current year, for any past year/s due to pay revision. And when this additional arrear is added with the current year’s income, the tax payable for the current year could be higher because of the change in one’s income tax slab rate to a higher tax slab.
Hence, the Government has introduced Section 89 under the Income Tax Act which comes as a relief in this context, as this provision allows a tax deduction for the additional tax burden on employees receiving salary arrears.
As per Section 89(1), tax deduction/relief is provided by recalculating tax for the year in which arrears are received and the year to which the arrears pertain; and the taxes are adjusted in the year in which they were due. In other words, if the taxpayer is required to pay any additional amount of tax (in the year of receipt) than what he would have originally paid had he received the money in the year(s) that he was supposed to receive it, such additional tax can be reduced from the tax payable.
Let’s discuss further on this…
Below are the steps to calculate the tax relief amount:
You may also visit the income tax website to calculate the Relief under Section 89. Here is the link – https://www.incometaxindia.gov.in/Pages/tools/relief-under-section-89.aspx#
Relief under Section 89(1) is available in the following cases:
In order to claim the relief under section 89, one must file Form 10E available in the income-tax portal (in the new e-filing portal, log in and on Dashboard, go to e-File > Income tax forms > File Income Tax Forms). Filing of Form 10E is mandatory. In the case of non-filing of Form 10E, the Income Tax Return will be processed but the relief claimed u/s 89 will not be allowed, i.e., the relief under section 89 of the Income-Tax Act will be allowed only if the Form 10E is filed before filing of income tax return.
Let us understand this calculation with an example:
Suppose, Ms. Nisha received Rs. 1,50,000 as arrears of pay in the financial year 2020-21 for the FY 2019-20. Under normal circumstances, she would have paid a tax of Rs. 1,10,760 on her income of Rs 9,70,000 for FY 2020-21. However, after the inclusion of the arrears of Rs. 1.5 lakh, her tax liability increases to Rs. 1,54,440.
Further, for FY 2019-20, she had paid a tax of Rs. 75,400 on her income received which was Rs. 8 lakhs. Had she received the arrears of Rs 1.5 lakhs in the year they were due, the tax liability would have been Rs. 1,06,600.
Using this data, the tax relief available to Ms. Nisha is computed below:
|1||Tax payable on the total income for FY 2020-21, including the arrears||1,54,440|
|2||Tax payable on the total income for FY 2020-21, excluding the arrears||1,10,760|
|3||Difference between Step 1 & Step 2||43,680|
|4||Tax payable on the total income for FY 2019-20, including the arrears||1,06,600|
|5||Tax payable on the total income for FY 2019-20, excluding the arrears||75,400|
|6||Difference between Step 3 & Step 4||31,200|
|7||Amount of relief = Step 3 – Step 6||12,480|
Note: If the tax payable as per Step 3 (tax payable in the year of receipt) is lower than the tax payable as per Step 6, meaning if there is no excess tax, then NO RELIEF will be allowed.
The author is a tax and finance consultant and can be reached out at [email protected] for any queries.