Salary Arrears refers to the pending salary or dues received in a lump sum for past financial years.
It usually happen due to delayed increments, promotions, DA revision etc.
Tax Impact of Arrears
Receiving arrears may increase your income in the current year, pushing you into a higher tax slab and increasing your tax liability.
How To Reduce This Burden?
To reduce this burden, Section 89(1) reliefs can be claimed on any of the following received during a particular year:
- Salary received in arrears or in advance
- Premature withdrawal from Provident Fund
- Gratuity
- Commuted value of pension
- Arrears of family pension
- Compensation on termination of employment
What is Section 89(1) Relief?
Section 89(1) provides tax relief when salary is received in arrears or in advance.
It help to ensure that you are not pushed into a higher tax slab due to arrear.
How To Calculate Tax Relief u/s 89(1) on Salary Arrears?
The calculation involves three steps:
A. Compute tax for the current year with and without arrears.
[Tax on total income including arrears – Tax on total income excluding arrears]
B. Compute tax for past years with and without the relevant arrears.
[Tax on total income for the year to which the arrears relate, including arrears – Tax on total income for the year to which the arrears relate, excluding arrears]
C. The difference between A and B in tax is the relief u/s 89(1).
Filing Form 10E
Form 10E must be filed online before claming relief u/s 89(1).
It is mandatory to file Form 10E on the Income Tax Department’s e-filing portal before filing the ITR.
If not filed, relief u/s 89 may be disallowed and a notice can be issued.
How to file Form 10E?
- Log in to the e-filing portal and log in with your credentials.
- Click on e-File > Income Tax Forms > File Income Tax Forms.
- Select Form 10E under “Persons not dependent on any source of income” or relevant category.
- Select the relevant Assessment Year.
- Select the applicable items regarding the particulars of income – arrear salary/ family income, advance salary, gratuity, or pension.
- Fill in the required details.
- Verify and submit Form 10E online.
Click Here To Know – Standard Deduction on Salary: Latest Updates for FY 2024-25
Points to Remember
Mandatory Filing: Without filing Form 10E, your claim for relief u/s 89(1) may be disallowed.
Documentation: Keep records of salary slips, arrear statements, and previous years tax returns.