Arrears

Any income due or received by an employee from his employer or former employer is taxable under the head `salaries’ as per the provisions of the Income Tax Act, 1961. It is pertinent to note that the salary earned in respect of a particular financial year is subject to tax as per the tax rates applicable for that financial year.

There are occasions when an employee may receive income in a particular financial year, which relates to earlier financial years, i.e., as arrears of salary or he may receive certain payments in advance for future financial years, i.e., as advance salary.

In such an event, it is possible that if the entire income is added to the salary income of that financial year, then the tax payer may have to pay tax at a higher rate depending on the slab rates under which his income is otherwise taxable.

In such a case, there is a relief provided under the Act to ensure that the employee is not worse off..

Here's how relief u/s 89 is calculated
Step 1: Calculate tax for the current year (including cess and education cess) on income including salary in arrears/advance/compensations.

Step 2: Calculate tax for the current year (including cess and education cess) on income excluding salary in arrears compensations.

Step 3: Step 1 minus Step 2

Step 4: Calculate tax for the year in which salary ought have been received (including cees and education cess) on income including salary in arrears compensations.

Step 5 : Calculate tax for the year in which salary/compensation ought have been received (including cess and education cess) on income excluding salary in arrears

Step 6 : Step 4 minus Step 5

Step 7 : Relief u/s 89 = Step 3 minus Step 6 (if positive, otherwise nil)

Step 8 : Tax paid for Current Assessment year = Step1 minus step7