Salaried employees may receive some arrears or advances that are taxable in nature and, hence, relief must be claimed while filing an income tax return (ITR). These include salary arrears, advance salary, family pension arrears, commuted pension or any compensation on termination of employment and have a subsequent impact on gross salary leading to a significant jump in tax liability.
Consequently, this will push the individual to a higher income tax slab. Hence, the income tax act allows relief under
Section 89(1) to reduce the impact of additional tax liability arising from the receipt of salary arrears. This relief can be claimed if the tax payable is higher after receiving such arrears.
In case there is no additional tax liability, relief is not allowed, experts say.
How to claim relief
To claim relief under Section 89(1), taxpayers are required to submit form number 10E. Online filing of this form is mandatory. Taxpayers basically need to mention the particulars of income received in a particular financial year, including arrears or advances, if any,
Calculation of relief from salary arrears
To understand the calculation of relief from salary arrears under Section 89(1), here's an example:
Suppose, Mr X (non-senior citizen) has a net taxable income of Rs 12,00,000 in the financial year (FY22-23) and received salary arrears of Rs 3,00,000 from the financial year (FY13-14), and his net taxable income in FY13-14 was Rs 8,00,000 (including arrears).
To compute the relief under Section 89(1), let's find out the tax liability for FY22-23 and for FY13-14.
Tax liability for FY22-23
Step-1: Calculate salary inclusive of arrears.
Total taxable income: Rs 12,00,000 + Rs 3,00,000 = Rs 15,00,000
Income tax: Rs 2,62,500
Cess: Rs 10,500
Total tax liability = Rs 2,73,000
Step-2: Calculate salary without arrears
Total income: Rs 12,00,000
Income tax: Rs 1,72,500
Cess: Rs 6,900
Total tax liability = Rs 1,79,400
Step-3: Difference between Tax at Step-1 and Tax at Step-2
Rs 2,73,000 - Rs 1,79,400 = Rs 93,600
Tax liability for FY12-13
Step-4: Calculate salary inclusive of arrears
Total income: Rs 8,00,000
Income tax: Rs 90,000
Education cess: Rs 2,700
Total tax liability: Rs 92,700
Step-5: Calculate the salary without arrears
Total income: Rs 5,00,000
Income tax: Rs 30,000
Education cess: Rs 900
Total tax liability: Rs 30,900
Step-6: Difference between tax at Step-4 and tax at Step-5
Rs 92,700 - Rs 30,900 = Rs 61,800
Step-7: Relief under Section 89(1): Step-3 minus Step-6
Rs 93,600 - Rs 61,800 = Rs 31,800
Step-8: Tax payable:
Tax at Step-1 minus Relief under Section 89(1)
Rs 2,73,000 - Rs 31,800 = Rs 2,41,200
Note: The total income is taxable income after claiming all the exemptions and deductions.
First Published: Jun 23, 2023 1:56 PM IST
