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:
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.
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:
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.