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Tax Relief under Section 89- On Salary Received in Advance or in Arrears

Deepti Shikha

| Updated: Mar 18, 2020 | Category: Income Tax, Taxation

Tax-Relief-under-Section-89

Income Tax is calculated on the taxpayer’s total income earned or received during the financial year. An employee’s tax liability might increase on receiving arrears. However, one can get some amount of tax relief under section 89 of the Income-tax Act, 1961. In case the assessee receives any portion of salary in arrears or in advance or as a family pension in arrears can claim tax relief under section 89. The difference between the tax liability in due year and the receipt year might vary due to the changes in the slab rates. For this reason, the provision of relief under section 89(1) comes in. Relief under section 89 is available only if the employee has not claimed tax exemption under section 10 (10C).

What is Tax Relief under Section 89 of Income Tax Act, 1961?

The receipt of arrears in salary can lead to a higher tax incidence in the hands of the employee as the amount gets taxed in the year of receipt. If the employees had received the amount in the year that it pertained to, the additional tax would have been divided over the years, instead of being paid as a lump sum. Section 89 titled as a relief when salary, etc., is paid in arrears or in advance, comes under Chapter VIII (Rebates and Reliefs) of the Income Tax Act, 1961.

According to Section 89 of the Income Tax Act-If, an individual gets salary in arrears or in advance in a financial year due to which his/her total taxable income increases, the person can claim relief under Section 89 of the Act. As per this section tax relief for arrears of salary are available in the following cases:

  • Salary received in advance or as arrears.
  • Gratuity.
  • The compensation received while on termination of employment.
  • Commutation of pension.

Calculation of Tax Relief Under Section 89 of Income Tax Act for Arrears in Salary

Below are the steps to calculate tax relief under section 89 of the Income Tax Act:

Step 1: Calculate the tax payable on total income, including additional salary – in the year in which it is received.

Arrears will reflect in Part B of Form 16.

Step 2: Calculate the tax payable on the total income, excluding additional salary or arrears in the year it is received. You can get the amount of the additional salary or arrears from the arrear document given by the employer.

Now you have to subtract the arrear from the total salary received including the arrears, which can be taken from your Form 16.

After calculating the amount after arrear, you need to calculate the tax over the same.

Step 3: Calculate the difference between the value obtained from Step 1 and Step 2.

Step 4: Find out the tax payable on the total income, including the arrears received of the year to which arrears are related.

Step 5: Calculate the tax payable on the total income of the year to which the arrears relate, excluding arrears.

Step 6: Calculate the tax payable on the total income of the year to which the arrears relate, including the arrears.

Step 7: Calculating the difference between step 3 and step 6.

Step 8: Excess of the amount of step 3 and step 6 is the tax relief that is to be allowed.

In case the amount in step 6 is more than the amount in step 3, the assessee will get no relief.

See Our Recommendation: Summary of 39th GST Council Meeting.

The above-mentioned steps have been explained in the given example:

Suppose the total income of Mr.X is Rs.15,00,000 per annum for the financial year 2019-2020. He also received an arrear of Rs.3,00,000 per annum for the financial year 2018-2019 of which his salary was Rs. 6,00,000 per annum.

Step1: Taxable Income on salary inclusive of arrears.

Total Income   Rs. 18,00,000
Income Tax   Rs.352500
Cess Amount   Rs.14100
Total Tax Liability   Rs.3,66,600

Step 2: Tax payable on the total income excluding salary in arrears

Total Income   Rs.15,00,000
Income Tax   Rs.262500
Cess Amount   Rs.10,500
Total Tax Liability   Rs.2,73,000

Step 3:Amount obtained in step 1-Amount obtained in step 2

Rs.3,66,600-Rs.2,73,000= Rs.93,600  

Step 4: Salary inclusive of arrears in financial year 2018-2019

Total Income   Rs.9,00,000
Income Tax   Rs.92,500
Cess Amount   Rs.3700
Total Tax Liability   Rs.96,200

Step 5: Salary excluding arrears

Total Income   Rs.6,00,000
Income Tax   Rs.32,500
Cess Amount   Rs.1300
Total Tax Liability   Rs.33,800

Step 6: Step 4-Step 5

Rs.96,200-Rs.33,800 Rs.62,400

Step 7: Relief under section 89 i.e Step 3- Step 6

Rs.93,600-Rs.62,400 Rs.31,200  

Alternatively, follow the steps on the income tax website in the link https://www.incometaxindia.gov.in/Pages/tools/relief-under-section-89.aspx to calculate the tax on arrears.

Filing of Form 10E

It is mandatory for individuals to file Form 10E if he/she wants to avail tax relief under section 10E of the Income Tax Act, 1961. Where the taxpayer is a Government employee, local authority, a co-operative society or an institution, a university, association or body is entitled to the tax relief under section 89. In the case of other employees, the application for the tax relief must be made to the assessing officer, instead of the employer. As prescribed in  Section 89, tax relief is provided by recalculating tax for both the years, the year in which arrears are received and the year to which the arrears pertain. The taxes are adjusted assuming that the arrears were received in the year in which they were due. The prescribed steps must be followed to file Form 10E:

  • Step 1: Visit https://www.incometaxindiaefiling.gov.in/home and log in using the user ID’ (i.e. PAN), ‘date of birth (DOB)’ and ‘Password’.
  • Step 2: Click on the tab mentioned as-File’ and select ‘Prepare and Submit Online Form (Other than ITR)’ from the drop-down menu.
  • Step 3: Choose ‘Form 10E’ from the drop-down menu Choose Form 10E.
  • Step 4: Fill the relevant Assessment Year mentioned and press in the ‘Continue’ button.
  • Step 5: The screen instructions to e-file Form 10E will become available.
  • Step 6: Click on the blue tabs and fill all the relevant details.
  • Step 7: Click on the ‘Submit’ button after completion to finalise the process.
  • In case the assessee is not able to complete the process in the first attempt, he/she can save the information filled by clicking on the “Save Draft” button at the bottom of the screen and complete it later.

Failure in Filing Form 10 E

In case if an employee fails to file form 10E the amount in arrears will be calculated as the amount of the current year and will be calculated and taxed accordingly.

Gratuity Payment-Tax Relief under Section 89

The tax relief under section 89 is available only if the gratuity is received in respect of the previous services of the assessee that is extended over a term period of not less than 5 years.

 In other words, no relief is granted if the term period of service is less than 5 years. The amount of tax relief is calculated as under:

Step 1 Calculate the tax on the total income including the gratuity in the year of tax receipt of gratuity and also calculate the average rate of tax (TotalTax/Total Income)multiplied by 100
Step 2 The tax must be calculated on gratuity on the basis of the average rate of the tax that is computed in step 1.
Step 3 The tax liability must be calculated by adding 1/3rd  of the gratuity to the total income of each of the preceding 3 years and then calculate the average rate of the tax for each year separately.
Step 4 Calculate the average of the 3 average rates computed and compute the tax on the gratuity at that average rate.
Step 5 The excess of the tax on gratuity computed at step 2 over step 4 will be the relief that is granted under section 89.

Compensation on Termination of Employment-Tax Relief Under Section 89

The tax relief for compensation on termination of services will be available only if the below-mentioned conditions are satisfied:

  • When the compensation is received after the continuous services of not less than three years.
  • The unexpired part of the term of employment is also not less than three years.
  • The procedure for calculation of tax relief is the same as given as calculation of gratuity paid to the assessee in respect of services rendered for a term period of 15 years or more.

Commutation of Pension-Tax Relief under Section 89

The procedure for calculation of tax relief is the same as the calculation of gratuity i. e gratuity paid to the assessee in respect of the services rendered for a term period of 15 years or more.

The exception under Section 89 of the Income Tax Act

No tax relief under Section 89 shall be provided in the following cases:

  • No tax relief shall be provided in respect of any amount in case of Voluntary Retirement from services also known as VRS.
  •  Any scheme or schemes of voluntary retirement or in the case of a public sector company.
  • In case of voluntary separation of service on the amount as per section 10(i)(10C).

Contact Enterslice

Our professionals in enterslice will guide you in filing Income Tax Returns on time. Avail the benefit of our expert’s services to file your returns.

Conclusion

Section 89 applies when salary or pension or other components are paid in arrear or in advance. As per section 89, in case an individual receives arrears or advance in a financial year due to which the total income for the year increases, which in turn increases the total taxable income relief can be claimed under section 89. File form 10E with all the details and then submit it to the current employer to claim tax relief. Form 10E must be submitted online, and no copy needs to be attached with the tax return.

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Deepti Shikha

Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.

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