Section 89 (1) read along with Rule 21A of the Income-tax Act-1961 allows employees to claim tax relief.
Relief under Section 89, Arrears are the amount receives by an employee in the current financial year, which pertains to past dues. As everyone is aware of the fact that tax slabs keep changing from year to year basis, so, arrear may bring the burden on employees of paying higher taxes due to changes in tax slabs every financial year.
Relief under Section 89 (1) read along with Rule 21A of the Income-tax Act-1961 allows employees to claim tax relief.
Generally, a person receives a salary when it becomes due but many times an employee may receive a part or the whole salary in the form of advance or arrears.
In such cases, relief of tax under section 89 (1) of the Income-tax Act-1961 comes to act as a provision given in the Income Tax Act, 1961.
The Relief under section 89(1) of the Income-tax Act-1961 is available under the following cases:
- Arrears or advance salary received
- Salary received for more than 12 months in the same financial year;
- Family Pension being paid in arrears
- Gratuity
- Compensation on termination of employment; and
- Commuted Pension.
Who can claim relief under section 89 (1) of the Income-tax Act-1961?
Any government or private employee is eligible to claim relief under 89(1), only, if the tax paid is actually higher due to arrears received.
How to calculate relief under section 89 (1) of the Income-tax Act-1961?
Following the example explained with few steps can help you to understand the calculation of relief under 89(1):
Let’s assume Mr. A earned Rs. 7,00,000/- as total income in FY 2019 – 20, which includes Rs. 1,00,000/- received as arrears of salary of FY 2018-19. His salary in FY 2018 – 19 was Rs. 400,000/-.
In this situation, the relief under section 89(1) of the Income-tax Act, 1961 which Mr. A can claim will be as per the given calculation: –
Step – 1 Calculate tax on the income of F.Y. 2019 – 20 (i.e. of the year in which arrear has been received) inclusive and exclusive of arrear. Also, calculate the tax difference.
Please refer below table for it: –
|
Year |
Taxable Income (A) (In Rs.) |
Arrear receive (B) (In Rs.) |
Total Income of the current year (A-B =C) (In Rs.) |
Tax on (A) (In Rs.) |
Tax on (C) (In Rs.) |
Diff. (C – A) (In Rs.) |
|
FY 2019-20 (AY 2020-21) |
7,00,000 |
1,00,000 |
6,00,000 |
52,500 |
32,500 |
20,000 |
Step – 2 Calculate tax on the income of F.Y. 2018 – 19(i.e. of the year, of which arrear has been received) inclusive and exclusive of arrear received. Also, calculate the tax difference.
Please refer below table for it: –
|
Year |
Taxable Income (A) (In Rs.) |
Arrear receive (B) (In Rs.) |
Total Income (A+B =C) (In Rs.) |
Tax on (A) (In Rs.) |
Tax on (C) (In Rs.) |
Diff. (C – A) (In Rs.) |
|
FY 2018-19 (AY 2019-20) |
4,00,000 |
1,00,000 |
5,00,000 |
7,500 |
12,500 |
5,000 |
Step – 3 Now Subtract the Difference of tax value calculated in step 2 from the Difference of tax value calculated in step 1, as below:-
Rs. 20,000/-less Rs. 5,000 =Rs. 15,000/-.
The employee can claim relief of Rs.15,000/- under section 89 (1) of the Income-tax Act, 1961.
** No relief shall be allowed if the amount of step 2 is more than the amount of step 1.
To avail the benefits under Section 89(1) of the Income-tax Act, 1961 assessee would need to submit Form 10E.
Form 10E – For claiming relief under section 89(1) of the Income-tax Act, 1961 for arrears of salary received, it is mandatory to file Form 10E with the Income Tax department.
If Form 10E is not filed and relief is claimed, then the taxpayer is more likely to receive notice from the Income Tax department for not filing Form 10E.
When is Form 10E required to be submitted?
Form 10E is to be submitted before filing the Income Tax returns.
How to submit Form 10E?
Steps to submit Form 10E with the Income-tax Department:
- Login to Income Tax e filing account
- Go to e-File>> Income Tax Forms
- Under “Form Name”, select “FORM NO. 10E – Form for relief under section 89 of income tax act, 1961″.
- Select the Assessment Year for which Form 10E is to be filed. For example, if arrears of salary are received in the Assessment Year 2020 – 21 (Financial Year 2019 -20), select Assessment Year as 2020 – 21.
- Select the Submission mode
- Click on “Continue“
- Fill the relevant details. Click on “Save Draft” to save the Form.
- In the tab Form 10E, select the Annexure you want to fill. In Arrears of Salary, select Annexure-I. Total Annexures available in this tab are as under:
- Annexure-I is for Arrears or Advance Salary
- Annexure-II is for Gratuity (Past services over 5 years but less than 15 years)
- Annexure-II A is for Gratuity (Past services for 15 years or more)
- Annexure-III is for Compensation on Termination of employment
- Annexure-IV is for Commutation of Pension
- Click on “Preview & Submit” and then submit the Form.
A point to remember: – If an employee has received VRS compensation(Voluntary retirement scheme), there is no relief provided under section 89 of income tax act, if the exemption has been claimed by the assessee under section 10 (10C) for a VRS. Only one of these exemptions can be claimed and the two cannot be clubbed together.
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