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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. 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:

a) Salary received in arrears or in advance
b) Premature withdrawal from Provident Fund
c) Gratuity
d) Commuted value of pension
e) Arrears of family pension
f) Compensation on termination of employment

Section 89(1) – Relief of Salary

Tax is calculated on a taxpayer’s total income earned or received during the financial year. If the assessee has received a potion of his salary ‘in arreas or in advance’, or received a Family Pension in arrears, the Income Tax Act allows you to claim tax relief under section 89(1). Tax liabilities for a taxpayer are calculated from the income earner during that financial year. This income can include past dues paid in the current year. Tax rates increase over the years and the assessee may have to pay higher taxes in such cases. Income tax act provides relief to assessees u/s 89(1) in such situations.

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.

1. 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

2. 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.

3. 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).

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

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.

Click here to use - Income Tax Calculator

Five Things to Remember when Claiming Relief on Arrears

1. 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.

2. 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.

3. 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.

4. 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.

5. 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?

It is the form that is required to furnish details of the income received under section 192(2A).

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

You can fill the form 10E yourself by following a few simple steps.

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

Link: www.incometaxindiaefiling.gov.in

Step 2: Click on the ‘Login’ button located at the top right corner. Enter your 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 and 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.

Income Tax Notice for Non-Filing of Form 10E

Form 10E is essential to claim the tax relief provided under Section 89(1) of the Income Tax Act. But if you do not file Form 10E, then the claim will be disallowed.

Yes, you heard it right. The Income Tax Department has directed that it is compulsory for you, as a tax-payer to fill Form 10E, before you can claim the benefits under section 89(1).

Thus, if you have not filled this form and still claimed relief under 89(1) while filing the return, then your ITR will be filed but relief will be disallowed. You will be issued a notice regarding the same from the Income Tax Department. This form is to be filed before filing the return of income.

FAQs Related to Tax Relief Under Section 89(1)

1. 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).

2. 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.

3. 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.

4. What is Form 10E & where can I file it?

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. To claim this relief, Form 10E is required.

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. You can file Form 10E on this website- Link: www.incometaxindiaefiling.gov.in

5. Which assessment year should I choose while filing Form 10E?

Income Tax Department has made the filing of the form, 10E compulsory to claim the tax relief u/s 89. This is applicable since the FY 2014-15. While filling 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 2019-20, then your AY will be the following year i.e., 2020-21.

6. Do I need to attach a copy of Form 10E with my tax return?

No, you do not need to attach a copy of Form 10E along with your tax return statement. Form 10E is available online and can be filled on the income tax filing website itself. So once you have filled the form you do not need to attach it with your Income-tax return. Income tax does not require any annexures. However, it is advised to keep your documents safe so you can submit them if the need arises in the future.

7. How to calculate income tax on salary?

Income tax is charged based on the ‘slab system’ in India. Slabs are created on the basis of income and each slab has a different tax rate. You will pay the tax according to the slab you fall in.

There are now two slab systems, one under the old regime and one in the new regime which was introduced in FY 2020-21. You have the liberty to choose the regime you want to be taxed under.

Old Regime Slab Rates

Income (In Rs) Tax Rate
0 - 2.5 lakh 0%
2.5 - 5 lakh 5%
5 - 10 lakh 20%
Above 10 lakhs 30%

New Regime Slab Rates

Income (In Rs) Tax Rate
Up to Rs 2.5 lakh 0%
2,50,001 - 5,00,000 5%
5,00,001 - 7,50,000 10%
7,50,000 - 10,00,000 15%
10,00,001 - 12,50,000 20%
12,50,001 - 15,00,000 25%
Above 15,00,000 30%

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