Arrears of Salary (Relief u/s 89)

This document covers

1. Salary & Tax treatment
2. Relief u/s 89
1. Scenarios where relief u/s 89 can be claimed
2. Example for Salary arrears
3. How to calculate relief u/s 89 for Arrears
3. What is Form 10E?
4. How to file Form 10E?

1. Salary & Tax treatment

Any payment made by an employer to his employee for the rendered services will be chargeable under the head salaries. For the income to be chargeable under the head 'salaries', there should be a relationship of employer and employee between the payer and payee.

• Salaries are chargeable to tax either on due basis or on receipt basis whichever is earlier.
• Advance Salary: If the salary paid in advance which was charged to tax in the year of payment, it should not be taxed in the year in which it becomes due.
• Arrears of Salary: If the salary paid in arrears was already charged to tax in the year of due, it should not be taxed again in the year of payment.

2. Relief u/s 89

If the taxpayer's salary is paid in arrears or advance and the taxpayer's taxable income increases due to such arrears or advance which results in higher income tax, relief u/s 89 will be given from the income tax payable.

2b. Example for Salary arrears

Mr Arjun is a salaried employee, and he is getting an salary of Rs 50000 per month. His salary was increased to Rs 60000 from Feb 2022 and it got paid in May 2022. As the salary for Feb and March 2022 of Rs 20000 got paid in May 2022, it is treated as arrears of salary.

2c. How to calculate relief u/s 89 for Arrears?

Following are the steps to compute the relief u/s 89 for Arrears or Advance salary

1. Calculate tax on total income including the arrears received in the financial year.
2. Calculate tax on total income excluding the arrears received in the financial year.
3. Compute the difference between step 1 & step 2.
4. Calculate tax on total income including the arrears for the financial year in which arrears are due.
5. Calculate tax on total income excluding the arrears for the financial year in which arrears are due.
6. Compute the difference between step 4 & step 5.
7. Compute the difference between step 6 and step 3. The difference between step 6 and step 3 is the relief. If step 6 is greater than step 3, no relief will be allowed

3. What is Form 10E?

1. To claim relief u/s 89 for arrears or advance salary, the taxpayers need to furnish Form 10E.
2. Form 10E must be filed before filing of Income tax return.
3. If Form 10E is not filed, the taxpayers cannot claim relief u/s 89. Relief u/s 89 will be disallowed if form 10E is not filed.

4. How to file Form 10E?

1. Form 10E can be filed online through https://www.incometax.gov.in/iec/foportal/
2. Go to e-file > Income Tax Forms > File Income Tax Forms
3. Click on Persons without Business/Professional income and select file now on Form 10E (Tax Exemptions and Reliefs).
4. Select the relevant Assessment year
5. Select the applicable forms i.e.,
1. Arrears Salary/Family Pension
2. Advance Salary
3. Gratuity
4. Compensation
5. Pension commutation
6. Enter the required information like current year income and previous income for which the arrears/advance belongs.
7. Complete the e-verification through Aadhar otp/bank EVC/Net banking