Published by: Vivek Dubey
Salaried employees may receive taxable arrears or advances, such as salary arrears, advance salary, family pension arrears, commuted pension or compensation on termination of employment.
Relief under Section 89(1) of the income tax act can be claimed while filing an ITR 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.
To claim relief under Section 89(1), taxpayers must submit form number 10E online before filing a tax return. This form requires the taxpayer to mention the particulars of income received in a particular financial year, including arrears or advances.
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).
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
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
Difference between Tax at Step-1 and Tax at Step-2 Rs 2,73,000 - Rs 1,79,400 = Rs 93,600
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
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
Difference between tax at Step-4 and tax at Step-5 Rs 92,700 - Rs 30,900 = Rs 61,800
Relief under Section 89(1): Step-3 minus Step-6 Rs 93,600 - Rs 61,800 = Rs 31,800
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.