Claiming Relief under Section 89(1) on Salary Arrears

In a situation where your total income includes any past dues paid in the current year, you may be worried about paying a higher tax on such arrears.

In such a situation, section 89(1) can come to your rescue. Read more to find out.

What is relief under section 89(1)?

Tax is calculated on your total income earned or received during the year. If your total income includes any past dues paid in the current year, you may be worried about paying a higher tax on such arrears (usually, tax rates have gone up over the years plus the addition of past income increases your tax slab rate).

To save you from any additional tax burden due to delay in receiving income, the tax laws allow a relief under section 89(1). In simple words, you do not pay more taxes if there was a delay in payment to you and you were in a lower tax bracket for the year you received the money.

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

How to calculate tax relief under Section 89(1) on salary arrears

If in case of receipt of past salary, salary in advance or receipt of family pension in arrears, you are allowed some tax relief under section 89(1).

Here’s how you can calculate the tax relief yourself –

Step 1: 
Calculate tax payable on the total income, including additional salary – in the year it is received. The arrears provided will reflect in Part B of Form 16.

Step 2:
Calculate tax payable on the total income, excluding additional salary in the year it is received. You can get the amount of additional salary (Arrears) from the arrear document given by your employer. You have to subtract the arrear from the total salary received (including the arrears), which can be taken from your Form 16. This calculation will give you the exact amount of tax liability in the given year if there were no arrears.

Step 3: 
Calculate the difference between Step 1 and Step 2. 
This will give you the additional tax liability created due to arrears of income.

Step 4: 
Calculate tax payable on the total income of the year to which the arrears relate, excluding arrears.

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

Step 6: 
Calculate the difference between Step 4 and Step 5. 
This will calculate the actual tax liability in any past year pertaining to which arrears have been received in the current year, had the full arrears received in the same past year.

Step 7: 
Excess of the amount at Step 3 over Step 6 is the tax relief that shall be allowed. If the amount in Step 6 is more than the amount in Step 3, no relief shall be allowed. Alternatively, you may follow the steps on the income tax website to calculate the tax arrears. Once you have calculated this amount, you can enter the values on Cleartax and proceed to file your return.

Filing Form 10E

To claim the benefits under section 89(1), filing Form 10E is mandatory. You can file this form online on the income tax e-filing portal. To access the form, you must log in to your account.

How to file Form 10E

You can file Form 10E by online method. Here are the steps to file Form 10E online:

Step 1: Log in to www.incometax.gov.in with your User ID and password.

Step 2: After you have logged in, click e-File > Income tax forms > File Income Tax Forms.

Step 3: The below screen shall appear. Click on the ‘Persons not having any business/professional income’ tab and select Form-10E.

Step 4: The below screen shall appear. Select the assessment year and click on the ‘Continue’ button.

Step 5:The below screen shall appear. Click on the ‘Let’s Get Started’ button to start filling up the form.

Step 6: Now select the relevant items regarding the particulars of income and click on the ‘Continue’ button.

Step 7: In the next screen, click on the links and provide details for each section.

Step 8: After filling in all the details in the Form-10E, click on the ‘Preview’ button.

Step 9: On the preview page, proceed to e-verify.

A message will be displayed on the successful submission of the form mentioning the transaction ID and acknowledgement receipt number. 
 

Income Tax Notice for non-filing of Form 10E

From the financial year 2014-15 (the assessment year 2015-16), the income tax department has made it mandatory to file Form 10E if you want to claim relief under section 89(1). Taxpayers who have claimed relief under section 89(1) but have not filed Form 10E have received an income tax notice from the tax department with the following lines –

The relief u/s 89 has not been allowed in your case, as the online form 10E has not been filed by you. The furnishing of Online form 10E is required as per sec.89 of the Income Tax Act.

5 things to remember when claiming relief on arrears

1. Form 10E must be submitted online. All taxpayers who claimed relief in the previous fiscal year but did not complete Form 10E will receive a non-compliance notice from the income tax department; however, your return will not be processed until you submit the form.

2. Salary is normally taxable when it is due or when it is received, but arrears are usually announced from a back date, so they cannot be taxed when they are due.

3. Before filing your ITR, submit Form 10E. When determining the assessment year for arrears, you must select the year in which the arrears were received. For example, if arrears were received in the fiscal year 2017-18, the assessment year will be the fiscal year 2018-19.

4. You are not obliged to include a copy of Form 10E with your tax return. You must, however, file and maintain all documents in your records.

5. Your employer may request proof of receipt of Form 10E; however, this form is not required to be submitted to the employer.

Frequently Asked Questions

What is Form 10E?

Starting the financial year 2014-15 (the assessment year 2015-16), the income tax department has made it mandatory to file Form 10E if you want to claim relief under section 89(1).

Where can I file Form 10E?

Form 10E can be filed online on www.incometax.gov.in – steps are listed here.

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

Choose the assessment year in which arrears have been received by you. For example, if arrears are received in the financial year 2018-19, choose the assessment year 2019-20.

Do I need to submit Form 10E before filing my return, or it has to be submitted after filing an income tax return?

You must submit Form 10E before filing your income tax return. In case you have submitted your return and not filed Form 10E, and you have claimed relief under section 89(1), most likely you will receive a notice from the tax department asking you to file Form 10E.

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

Form 10E has to be submitted online and no copy is required to be attached to your tax return. If you have filed Form 10E online, no documents are required to be submitted to Cleartax or the income tax department. Income tax returns are annexure less returns. However, you must keep all your documents safely in your records in case AO asks for them in future.

Do I need to submit Form 10E to my employer?

Your employer may ask for confirmation of submission of Form 10E before adjusting your taxes and allowing tax relief. It is not mandatory to submit this form to the employer.

How to calculate income tax on salary?

In India, individuals and HUF are taxed according to the slab system above their basic exemption limit. Slabs for individuals are as follows:

• 5% tax from 2.5 lakh to 5 lakh income,
• 20% from Rs 5 lakh to 10 lakh income, and
• 30% for more than 10 lakh of income.

This income is calculated after all the deductions and exemptions allowed in income tax. However, from FY 2020-21, the income tax department has introduced a ‘New tax regime’ wherein the individuals will be taxed at a concessional slab rate provided they will forgo most of the deductions and exemptions in the old regime. Also, click here to calculate your tax liability using Cleartax Calculator. This calculator will give you tax liability in both regimes.

How to save income tax on salary?

There are many ways to save income tax by proper tax planning. The income tax Act provides certain deductions and exemptions that can be claimed which will reduce your total taxable income and reduce tax outflow. Below are some of the most common deductions and exemptions

• Deduction up to Rs 1.5 lakh under 80C – Investment in tax saving options like 80 C- investing in ELSS, LIC, mutual funds, the deduction for tuition fees for children, the deduction for the principal amount of home loan, etc
• Additional deduction of Rs 50,000 above Rs 1.5 lakh in 80 CCC (1b) for a contribution towards National pension schemes of the central government.
• 80D allows deduction of the medical insurance premium paid for self, spouse, children (Rs 25000 / 50,000 ) and dependent parents ( Rs 25000 / 50,000)
• 80G allows a deduction for donation made to recognized institutions and trusts as per specified limits.
• House rent allowance exemption allowed partially or fully under 10 (13A)
• Deduction for higher education loan under 80E
• Deduction for a home loan paid under section 24 up to 2 lakhs for the self-occupied and full amount if rented property

How to save income tax on a salary other than 80c?

Options for tax saving other than salary is as below:

• House rent allowance exemption allowed partially or fully under 10 (13A). You can claim this deduction even if you are staying at your parent’s house provided you make the payment of rent the same is shown in the ITR of your parents. Also, you should not be a joint owner of the property for which you are claiming HRA.
• Deduction for higher education loan under 80E
• 80D allows deduction of the medical insurance premium paid for self, spouse, children (Rs 25000 / 50,000 ) and dependent parents ( rs 25000 / 50,000)
• 80G allows a deduction for donations made to recognized institutions and trusts as per specified limits.
• You can claim LTA exemption for domestic trips twice in a block of 4 years.

I have more questions, whom should I ask?

Drop us an email at support@cleartax.in and we’ll help you out.

Related Articles:

• Filing Form 10E is Mandatory to Claim Relief under Section 89(1)
• TDS on Salary under Section 192
• What is Advance Tax? – Advance Tax Calculator

File your returns in just 3 minutes

100% pre-fill. No manual data entry

File Now