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How to claim tax relief on Salary Arrears under Section 89?

How to claim tax relief on Salary Arrears under Section 89?

How to claim tax relief on Salary Arrears under Section 89?
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The advance or arrears received from an employer affect your taxes and are reflected in the year of receipt. To mitigate additional burden, the Income Tax Act allows tax relief on salary arrears under Section 89 of the act.

An employee must meet certain conditions to claim relief under this section. To start with, Section 89 reliefs can be claimed on any of the following received during a particular year:

  • Salary received in arrears or in advance
  • Premature withdrawal from Provident Fund
  • Gratuity
  • Commuted value of pension
  • Arrears of family pension
  • Compensation on termination of employment

Claiming relief under section 89 –

An employee entitled to claim relief under Section 89 must submit Form 10E. It has to be filed online at the e-filing portal of the income tax department. As per Section 89(1), tax 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.

Note: Form 10E has to be filed before filing of the Income Tax Return.

Features of Form 10E:

Form 10E includes details regarding the total income of an employee and arrears received.

  • Submission of form 10E is easy and completely digital, available on the e-portal of the Income Tax Department. One must simply visit the portal and login to your account or create an account if you are a new user
  • Form 10E is available in the income tax forms section on the portal. Fill the form carefully and be mindful of the annexure given while filling the form.
  • You must select the relevant annexure and fill it (Annexure I is for arrear amount, Annexure II for gratuity, and Annexure III for compensation received on termination of job).

Mandatory requirement to claim relief u/s 89 – When claiming relief u/s 89 online, your salary slips serve as proof of receipt of arrears.

How is relief u/s 89 calculated?

1) Calculate tax payable on the total income, including additional salary, arrears or compensations, in the year it is received.

2) Calculate tax payable on the total income, excluding any additional salary, in the year it is received.

3) Subtract the calculation derived from Step 2 from the total salary calculation from Step 1.

4) Calculate tax payable on the total income, excluding arrears, for the year to which the arrears relate.

5) Calculate tax payable on the total income, including arrears, for the year to which the arrears relate.

6) Now calculate the difference between Step 4 and Step 5.

7) Excess of amount at Step 3 over Step 6 is the tax relief that will be allowed to you, while in case the amount in Step 6 is more than the amount in Step 3 no relief will be allowed.

Alternatively, you may follow the steps on the income tax website.

Things to remember when claiming relief on arrears:

  • Form 10E must be filed online. All taxpayers who claimed relief in the last financial year but did not file Form 10E will receive a notice from the Income Tax department for non-compliance, however, your return will not processed until you submit the form.
  • Salary is usually taxable when it is due or when it is received, but in case of arrears, they are usually announced from a back date, which is why they cannot be taxed when due.
  • Submit Form 10E before filing your ITR. When it comes to choosing the assessment year for arrears, you must choose the assessment year in which arrears have been received. Example, if arrears were received in FY 2017-18, the assessment year shall be AY 2018-19.
  • A copy of Form 10E is not required to be attached with your tax return. However, you must file and keep all documents in your records.
  • Your employer may ask for a confirmation of submission of Form 10E, however, it is not necessary to submit this form to the employer.

Frequently Asked Questions:

Q- I have to pay additional tax due to past year's salary arrears. What can I do?

To reduce the additional tax burden from arrears, section 89 of the Income Tax Act is introduced, within which if the total income of previous year includes salary arrears, you can avail tax relief under section 89(1).

Q- Can I claim relief for an arrear of past years if it is not mentioned in form 16 of the current year?

Yes, you can claim the relief by providing details related to your arrears at the time of filing of return, even if it is not mentioned in Form 16.

Q- Can I claim relief for HRA arrears under Section 89?

HRA is considered a part of the salary and all salary arrears come under the purview of Section 89, hence it can be claimed under this section.

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