Section 89 of Income Tax Act - Claim Tax Relief on Salary Arrears

2025-05-08

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The advance or arrears received from an employer affect your taxes and are reflected in the year of receipt. Relief under Section 89(1), according to Income Tax Act saves you from additional tax burden if there is a delay in receiving income.

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

Key Takeaways

Section 89 provides tax relief when an individual receives salary arrears, advance salary, or pension arrears.
To claim relief, the arrears must relate to a previous financial year, and the taxpayer must be a salaried individual or pensioner.
The tax liability is recalculated as if the arrears were received in the respective years.
Filing Form 10E through the Income Tax e-filing portal is essential for claiming relief. Without it, the claim can be denied even if the taxpayer is eligible.
Ensure Form 10E is filed before submitting ITR, enter correct arrear details, maintain supporting documents like salary slips and Form 16, and cross-check Form 16 for accurate reporting.

What is Section 89 of the Income Tax Act?

Let us understand in detail what section 89 of income tax entails:

Overview of Section 89: Section 89 of the Income Tax Act provides tax relief when an employee receives salary arrears, advance salary, or any other delayed income. Since such payments may push the taxpayer into a higher tax bracket, this section ensures that the additional tax burden is distributed over the years to which the income actually pertains.
Importance of Section 89 for Tax Savings: Claiming relief under Section 89 helps reduce excess tax liability caused by a sudden spike in taxable income due to arrears. Without this relief, individuals may pay more tax than necessary, which can be unfair when the income relates to previous financial years with potentially lower tax rates.

Section 89(1) – Relief of Salary

Tax is calculated on your total income earned or received during the financial year. If you have received a portion of your salary ‘in arrears or in advance’ or received a Family Pension in arrears, then you may be worried about paying higher taxes on such an amount. Tax liabilities for a taxpayer are calculated from the income earned during that financial year. This income can include past dues paid in the current year. Tax rates increase over the years, and thus, you may have to pay higher taxes in such cases.

Under this condition, the Income Tax Act allows you to claim a tax rebate under Section 89(1). Thus, you do not have to pay more in case of delay in payments to you.

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Claiming Relief under Section 89

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. You can claim relief under Section 89 by submitting Form 10E. It has to be filed online at the Income Tax Department's e-filing portal.

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

Conditions for Claiming Relief

To claim tax relief under Section 89:

The arrears must pertain to a previous financial year.
The taxpayer must be a salaried individual or pensioner.
Form 10E must be submitted before filing the income tax return.
The relief applies only to income tax and not to other deductions like PF or professional tax.

How Does Section 89 Work?

When you receive arrears or advance salary, your taxable income for that year increases, leading to a higher tax liability. Section 89 helps reduce this burden by spreading the income across the years it actually pertains to. Instead of paying tax on the entire amount in the year of receipt, the tax is recalculated as if the income had been received in the relevant years.

However, to avail of this relief, you must:

Include the tax computation details in your income tax return for the year you received the payment.
File Form 10E online through the Income Tax Department’s portal before submitting your return.

Step-by-Step Explanation

Compute the total tax liability for the year when arrears were received.
Calculate tax liability as if the arrears were received in the year(s) they pertain to.
The difference between the two tax amounts determines the relief available under Section 89.

Tax Computation in Different Scenarios

If the arrears push the taxpayer into a higher tax slab, Section 89 helps distribute the tax burden.
If the previous year’s tax rates were lower, relief calculation ensures a fair tax adjustment.

Did You Know?

Failing to file Form 10E before claiming relief under Section 89(1) may lead to the denial of benefits and a tax notice.

Source: Clear Tax

Eligibility Criteria for Claiming Relief

To qualify for claiming relief under section 89, you have to meet the following conditions:

Indian Resident: The taxpayer should have indian citizenship during the relevant assessment year.
Retirement benefits account: The retirement savings account must be in a country recognised by India for this purpose.
Residency Status at account opening: At the time of account opening, the taxpayer must have NRI status and be a resident of the notified country.
Foreign Taxation: The income earned from the retirement account must be taxed by the country. The taxation should be on a withdrawal basis, not on accrual or earnings.

How to Calculate Tax Relief under Section 89(1) on Salary Arrears?

Now that you know what is section 89 of Income Tax Act, let’s understand how to calculate your tax relief on the salary arrears.

Here is a step-by-step guide that you can follow:

Calculate tax payable on the total income, including additional salary, arrears or compensations, in the year it is received.
Calculate tax payable on the total income, excluding any additional salary, in the year it is received.
Subtract the calculation derived from Step 2 from the total salary calculation from Step 1.
Calculate tax payable on the total income, excluding arrears, for the year to which the arrears relate.
Calculate tax payable on the total income, including arrears, for the year to which the arrears relate.
Now calculate the difference between Step 4 and Step 5.
Excess of the 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.

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Year of Arrears vs. Year of Receipt:

Tax relief is applicable when salary arrears are received in a lump sum in a different financial year than the one in which they were originally due. The taxpayer benefits by recalculating tax liability for the earlier years.

Tax Relief Calculation Process:

Calculate tax liability with and without arrears for the current year.
Calculate tax liability with and without arrears for the relevant previous years.
The difference in tax amounts determines the relief under Section 89.

Illustration with an Example:

Consider an individual who received ₹1,00,000 as arrears in FY 2023-24 for work done in FY 2020-21. By recalculating tax for both years, the relief is determined as the excess tax paid in the current year minus the adjusted tax liability of the previous year.

Filing Form 10E for Tax Relief

Now, let us look at the relevance of Form 10 E in tax relief.

Importance of Form 10E:

Form 10E is mandatory for claiming tax relief under Section 89. Without filing this form, the relief may be denied, even if eligible. Key Features of Form 10E:

It must be filed online via the Income Tax Department's website.
No physical submission is required.
Details of arrears and their respective financial years must be provided.

How to File Form 10E Online?

Log in to the Income Tax e-filing portal.
Navigate to the ‘e-File’ section and select ‘Income Tax Forms.’
Choose ‘Form 10E’ and enter details as per your salary breakup.
Submit and download the acknowledgement.

Documentation Required for Form 10E:

Salary slips or employer-provided arrears breakup.
Previous years' tax returns (for accurate computation).
Any supporting documents related to salary revisions.

Common Mistakes to Avoid:

Filing Form 10E after submitting the tax return.
Entering incorrect arrear details.
Failing to retain proof of arrears received.

Five Things to Remember when Claiming Relief on Arrears

When claiming relief on arrears under Section 89 of the Income Tax Act, there are numerous things that you must consider for easy and error-free application. Here’s a list of five things that you must keep in mind:

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. For 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 to 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.

How to File Form 10E? How to File the Claim Form?

This form is required to furnish details of the income received under section 192(2A). The income tax department has made it compulsory to fill out form 10E to avail of and claim relief under section 89(1) regarding salary arrears. The Government has directed that this form be filed before filing the income tax return.

You can fill out the form yourself by following a few simple steps:

Step 1: Log in to the income tax filing site and click the link below to access the filing website.

Link: https://www.incometax.gov.in/

Step 2: Click on the ‘Login’ button located at the top right corner. Enter the particulars that are required by the site:

User ID (PAN No. or AADHAR No.)
Password

Step 3: After logging in, click on the E-file tab---> ‘Prepare and submit the online form’(Can be found in the drop-down menu)

Step 4: Click on the drop-down list of FORM NAME

Step 5: Find Form 10E and click on it. Choose the assessment year and click on the ‘Continue’ button.

Step 6: Please select the applicable items from the list of annexures.

Step 7: Check for the personal details, click on the ‘save’ button and save your selected annexure

Step 8: Enter the total income, arrear income, etc.

Step 9: Verify the entered details. Click on save and then proceed.

Taxability of Salary Arrears

Salary arrears are fully taxable but qualify for relief under Section 89.
They are added to the total income for the year in which they are received.
Tax relief ensures a fair distribution of the tax burden.

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Supporting Documentation for Claiming Tax Relief

What Documents to Keep?

Salary slips with arrears breakdown.
Form 16 from the employer.
Previous years' ITR for reference.
Form 10E acknowledgment.
Any correspondence with the employer regarding arrears.

Wrapping Up

Understanding and claiming tax relief on salary arrears under Section 89 of Income Tax Act is crucial for taxpayers facing delayed income payments. This provision alleviates the additional tax burden that may arise when income, such as salary arrears or gratuity, is received after its due date. By recalculating taxes for the relevant years and adjusting them accordingly, Section 89(1) ensures fairness in tax assessment. For more detailed guidance and assistance, you can consult with a tax professional to ensure compliance and maximise your tax benefits under Section 89(1).

Glossary

Arrears of Salary: Payments received for past periods of work that were not paid in the year they were due. It affects tax liabilities.
Gratuity: Employment payments to employees as a token of gratitude for their services, and the amount is eligible for relief under Section 89.
Form 10E: A form required to claim relief under Section 89(1), which needs to be filed online before submitting the income tax return.
Compensation on Termination: It refers to the lump sum payments received due to termination of employment and affects tax calculations and relief claims.

FAQs Related to Tax Relief Under Section 89

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

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

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.

The government to avoid the problem of over-taxation due to advance or arrear of salary, allows you to claim a tax-relief u/s 89. Form 10E is required to claim this relief.

There can be times when you do not receive your salary on time. You may receive your salary later or maybe earlier than the due date. According to the Income Tax Act, salary is taxed in the year in which it is received. In a case when you have received a salary that was due the previous year, in this FY, then it can unnecessarily increase your tax liability.

The Income Tax Department has made filing form 10E compulsory to claim the tax relief u/s 89. This has been applicable since FY 2014-15. While filling out the form, you have to choose the relevant Assessment Year (AY). Assessment year or AY is the immediate next financial year after the financial year for which you have to pay taxes. While filing Form 10E, choose the Assessment Year in which you received your arrears. For example, if you have received arrears in the FY 2025-26, then your AY will be the following year, i.e., 2026-27.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.