How to calculate tax relief on salary arrears under Section 89(1)?

Updated: as per amended finance act 2020

If an individual receives any portion of his salary in arrears or in advance or arrears of family pension or receives profits in lieu of salary, then such amount is taxable in the financial year in which it is received. However, the assessee can claim relief for arrears or advance of salary received as per provisions of section 89 read with rule 21A.

What is relief under section 89(1)?

Section 89(1) of IT act provides relief for additional tax burden due to delay in receiving such income. Here are the steps to calculate relief under section 89(1) of the Income Tax Act, 1961:

Calculation:

Step 1: Calculate tax payable on the total income, including arrears in the year it is received.

Step 2: Calculate tax payable on the total income, excluding arrears salary in the year it is received.

Step 3: Calculate the difference between step 1 and step 2     [ It is the amount of the additional tax owing to arrears in the year received ].

Step 4: Calculate tax payable on total income of the year to which arrears are related, including arrears.

Step 5:  Calculate tax payable on total income of the year to which arrears are related, excluding arrears.

Step 6:  Calculate the difference between steps (4) and step (5) [It was the amount of actual tax payable on salary for a related year]

Step 7: Excess of the amount at Step 3 over Step 6 is the tax relief that shall be allowed. No relief shall be allowed if the amount of (6) is more than the amount in (3).

For claiming relief under section 89(1) for arrears of salary received, it is mandatory to file Form 10E with the Income Tax department before filing IT returns. If Form 10E is not filed and relief is claimed, then the taxpayer is most likely to receive notice from the Income Tax department for not filing Form 10E.

You may follow the steps on the income tax website to calculate the tax on the arrears and filing 10E

Source: Income tax department

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