Introduction: –
Any Income received by an individual during the financial year is Taxable under their respective head of income. Sometimes, there arises an income which is resulting due to arrears in the previous year. This might create an additional tax burden on the Taxpayer, to avoid such an additional burden Section 89(1) of the Income Tax Act was introduced which allows the salaried people to claim relief if any arrears of Salary are received during the current financial year.
Conditions for Claiming Relief u/s 89(1): –
To become eligible for claiming Relief u/s 89(1), the employee must have received the following during a particular year:
Some other Conditions pertaining to relief are:-
- The Arrears should result in an additional tax burden.
- No relief can be claimed if the income does not increase the current tax liability.
- To avail the relief u/s 89(1), the individual must file Form 10E online which is also reflected in Form 16.
Form 10E:-
Starting from Financial Year 2014-15 (i.e. AssessmentYear 2015-16), the income tax department made it mandatory to file Form 10E to claim relief under section 89(1). Form 10E is a form that includes the total income of an employee and arrears received. This form is available on the Income-tax portal.
It is mandatory to file for Form E before filing the Income-tax return. If a person fails to file Form 10E but claims the relief of section 89(1), the Income-tax return will be processed successfully but the relief will be denied. Also, a notice will be issued by the Income-tax department for non-filling of Form 10E.
Illustration:-
Suppose Mr.A has an income of Rs.180,000 per month for the Financial year 2021-22, i.e. Assessment year 2022-23. He has received an arrear of total Rs.850000 which pertains to the previous years as follows:-
Particulars | Amount |
Financial Year 2016-17 | 215,000 |
Financial Year 2017-18 | 375,000 |
Financial Year 2018-19 | 260,000 |
Total | 850,000 |
The total income of those years were :-
Particulars | Amount |
Financial Year 2016-17 | 750,000 |
Financial Year 2017-18 | 11,58,000 |
Financial Year 2018-19 | 19,86,000 |
Calculation:-
Computation for A.Y.2022-23:-
Particulars | Tax on Salary with Arrears | Tax on Salary without arrears |
Current Salary of Mr.A | 21,60,000 | 21,60,000 |
Add: Arrears of Salary | 8,50,000 | Nil |
Taxable Salary | 30,10,000 | 21,60,000 |
Income Tax on above | 7,00,500 | 4,45,500 |
Health and Education Cess | 28,020 | 17,820 |
Total Tax Payable | 7,28,520 | 4,63,320 |
Computation for A.Y.2017-18:-
Particulars | Tax on Salary with Arrears | Tax on Salary without arrears |
Current Salary of Mr.A | 7,50,000 | 7,50,000 |
Add: Arrears of Salary | 2,15,000 | Nil |
Taxable Salary | 9,65,000 | 7,50,000 |
Income Tax on above | 1,08,000 | 65,000 |
Education Cess and SHE | 3,240 | 1,950 |
Total Tax Payable | 1,11,240 | 66,950 |
Computation for A.Y.2018-19:-
Particulars | Tax on Salary with Arrears | Tax on Salary without arrears |
Current Salary of Mr.A | 11,58,000 | 11,58,000 |
Add: Arrears of Salary | 3,75,000 | Nil |
Taxable Salary | 15,33,000 | 11,58,000 |
Income Tax on above | 2,57,400 | 1,44,900 |
Education Cess and SHE | 7,722 | 4,347 |
Total Tax Payable | 2,65,122 | 1,49,247 |
Computation for A.Y.2019-20:-
Particulars | Tax on Salary with Arrears | Tax on Salary without arrears |
Current Salary of Mr.A | 19,86,000 | 19,86,000 |
Add: Arrears of Salary | 2,60,000 | Nil |
Taxable Salary | 22,46,000 | 19,86,000 |
Income Tax on above | 4,74,300 | 3,96,300 |
Education Cess and SHE | 18,972 | 15,852 |
Total Tax Payable | 4,93,272 | 4,12,152 |
Calculation of Relief u/s 89(1):-
Particulars | Amount | Amount |
Tax Payable on Arrears in A.Y.2022-23:- | ||
Tax on Salary with Arrears | 7,28,520 | |
Less:- Tax on Salary without Arrears | (4,63,320) | 2,65,200 |
Tax Payable in respective Previous years on arrears:- | ||
Tax on Salary with Arrears (1,11,240 + 2,65,122 + 4,93,272) | 8,69,634 | |
Less:- Tax on Salary without Arrears (66,950 + 1,49,247 + 4,12,152) | (6,28,349) | 2,41,285 |
Relief under section 89 | 23,915 |
Conclusion:-
The benefit provided under this relief is the difference between the Net Tax difference of previous years and the Current Financial year. Net tax over here means the difference between the tax that includes arrears and tax that excludes arrears. This can be understood with the help of the Illustration given above.
Before the insertion of section 89(1), the taxpayer receiving salary had to face a considerable amount of distress as they had to pay extra tax for the arrears related to salary pertaining to previous years. But, after its introduction, it has provided a sigh of relief. This is because of the benefit that the section provides to the Tax Payer in the form of a reduction in additional tax liability arising due to arrears related to the salary of previous years. The process of filing Form 10E may be a bit hectic, but the advantages that section 89(1) provides outweigh the hassle created by the compulsion of filing form 10E.
(This article represents the views of the authors only and does not intend to give any kind of legal opinion on any matter)
Authors:
Kushal Mehta
Associate Consultant | +919930612247 | kushal.mehta@masd.co.in |LinkedIn profile
Shripriya Aithal
Associate Consultant |+918779984264|shripriya.aithal@masd.co.in|LinkedIn profile
