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.
How to calculate Tax Relief on Salary arrears under Section 89(1)?
Below are the steps to calculate the tax relief amount:
- Step 1 – We need to calculate the tax liability on the total income, including the salary arrears, in the year in which it is received.
- Step 2 – Calculate the tax liability on the total income, excluding the salary arrears, in the year of receipt. This step gives us the tax payable amount, had there been no arrears received in the current year.
- Step 3 – Calculate the difference in tax liability as Step 1 & Step 2. This would be the tax on the additional salary included in the total income.
- Step 4 – Calculate the tax liability on the total income, including the arrears amount received, for the year to which the arrears relate.
- Step 5 – Calculate the tax liability on the total income, excluding the arrears amount received, for the year to which the arrears relate.
- Step 6 – Calculate the difference between the amount calculated as per Step 4 and Step 5. This gives us the actual tax liability for the past year for which arrears are received in the current year.
- Step 7 – The excess amount at Step 3 over Step 6 will be the tax relief allowed under section 89. In case, there is no excess, i.e., if the tax calculated as per Step 3 is less than that calculated in Step 6, the employee need not apply for relief under section 89, i.e., no relief will be allowed.
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#
Cases where Section 89 applies?
Relief under Section 89(1) is available in the following cases:
- Salary received in arrears or in advance [Rule 21A(2)];
- Gratuity received for past services [Rule 21A(3);
- Compensation on termination of employment [Rule 21A(4)];
- Payment of commutation of pension [Rule 21A(5)]
How can you claim the tax relief calculated under Section 89?
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.
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.