How to Calculate Relief u/s 89(1) of the Income Tax Act?

CA Deepanshu Sharma | Last updated: 27 August 2021

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Quick Summary

Section 89(1) of the Income Tax Act provides relief for individuals who receive salary in arrears or advance. This relief aims to prevent a higher tax burden due to the timing of salary payments falling into higher tax brackets. The calculation involves comparing the tax payable in the relevant past financial year with and without the arrears, and then comparing the tax payable in the current year with and without the arrears. To claim this benefit, you must file Form 10E online before submitting your income tax return.

What is Section 89(1)

It is a relief provided by the income tax department in relation to amount received in advance or in arrears in the form of salary which is related to any other financial year.

Basically, when any person receive salary in arrears or in advance in any particular year then there might be chances that their income will falls in the higher slab and taxed at the higher rate, which would have not been the case if the same salary is receive in their respective year.

Therefore, to avoid such higher tax due to timing difference, income tax department has provided relief under section 89(1)

Calculate Relief u/s 89(1) for Salary Arrears

Steps to calculate the relief u/s 89(1)

Step 1 Calculate the tax payable on total income including arrears of relevant previous year in which salary should have been received. (A)

Step 2 Calculate the tax payable on total income excluding arrears of relevant previous year in which salary should have been received. (B)

Step 3 Calculate difference between A-B=(C)

Step 4 Calculate tax payable on Current year salary in which arrears of salary is received including arrears. (D)

Step 4 Calculate tax payable on Current year salary in which arrears of salary is received excluding arrears. (E)

Step 5 Calculate difference between D-E=(G)

Step 6 Benefit u/s 89(1) is G-C

Example

Mr. X is a government employee, his current year i.e., FY 2020-21 salary is INR 14,50,000/- Per annum and also receives arrears of salary for FY 2017-18 of INR 50,000.

Example

Now Mr. X is eligible to avail relief u/s 89(1) for the extra tax burden due to arrears of his salary, here below is the detailed calculation.

Step 1: Calculate the tax payable on total income including arrears of relevant previous year in which salary should have been received. 7,00,000/- (650000+50000), total tax on 7,00,000 is 66,950/-

Step 2: Calculate the tax payable on total income excluding arrears of relevant previous year in which salary should have been received. (B) 6,50,000, total tax on 6,50,000 is 56,650/-

Step 3: Calculate difference between A-B=(C), 10,300/- (66,950-56,650)

Step 4: Calculate tax payable on Current year salary in which arrears of salary is received including arrears. (D) 15,00,000 (14,50,000+50,000), Tax on 15,00,000/- is 2,73,000

Step 4: Calculate tax payable on Current year salary in which arrears of salary is received excluding arrears. (E) 14,50,000, Tax on 14,50,000 is 2,57,400

Step 5: Calculate difference between D-E=(G) (2,73,000-2,57,400= 15,600

Step 6: Benefit u/s 89(1) is G-C (15,600-10,300) = INR 5,300

Legal requirement to avail benefit u/s 89(1)

Form 10E

Every assessee is required to file form 10E to avail the benefit of Section 89(1), this form must be file before filing of Income tax return
This is online form; hence no physical documents are required to be submitted
This form is free of cost, therefore no govt charges need to be paid
If assessee fails to file form 10E, then he/she may receive income tax notice for non-compliance.

How to file Form 10E

Step 1 - Login to income tax website > Income tax Login

Step 2 - Go to e-file >>> income tax forms >>> File income tax forms >>>person without business/professional income

Go to e-file >>> income tax forms >>> File income tax forms >>>person without business/professional income

Step 3 - Select file now in the form 10E populated on the screen.

Select file now in the form 10E populated on the screen

Step 3 - Select Assessment Year and click on continue button

Form for claiming relief under Section 89

Step 4 - Select the option for which form 10E is to be filed, you can select multiple option if required.

Form for claiming relief under Section 89

Step 5 - Fill the relevant detail related to current year salary, previous year salary and arrears of salary in the required space

Arrears Salary

Step 7 - Once you fill up all the three section, the completed tick mark will be populated in all three and preview button will be highlighted, preview your submission, then submit.

Preview your submission and submit

FAQ :

Section 89(1) offers relief from income tax for salary amounts received in arrears or advance that pertain to a different financial year. It helps mitigate higher tax rates that might apply if the salary is received in a lump sum in a later year.

Relief is necessary because receiving salary in arrears or advance can push your income into a higher tax bracket for the current year, leading to an increased tax liability. Section 89(1) aims to correct this by taxing the arrears as if they were received in the year they were originally due.

The calculation involves determining the tax on your total income including arrears for the relevant past year (A), the tax on your total income excluding arrears for that past year (B), and the difference (C=A-B). Then, calculate the tax on your current year's income including arrears (D), the tax on your current year's income excluding arrears (E), and the difference (G=D-E). The benefit is G-C.

Form 10E is a mandatory online form that must be filed with the income tax department before you file your Income Tax Return to be eligible for the relief under Section 89(1). Failure to file it can result in an income tax notice.

Form 10E can be filed online by logging into the income tax website, navigating to 'e-file' > 'income tax forms' > 'File income tax forms', selecting 'person without business/professional income', choosing the relevant assessment year, and filling in the required salary details.

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About the Author

CA Deepanshu Sharma

Practice

Practicing Chartered Accountant with expertise in Indian Accounting, GST, Income Tax, TDS, Corporate law, Audit and Monthly MIS reporting. Previously worked with Genpact, EXL, and PWC in Financial Planning Analysis profile in Corporate Finance.

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How to Calculate Relief u/s 89(1) of the Income Tax Act?

What is Section 89(1)

Steps to calculate the relief u/s 89(1)

Example