Did you receive any advance salary or arrears of salary? If yes, you might be worried about the tax implications of the same. Do I have to pay taxes on the total amount? What about the tax calculations of the previous year and so on? For taxpayers who have such questions in their minds, here is all that you need to know.
By now, you would have already figured out that Income-tax is calculated on the total income of a taxpayer for a certain year. The income can either be in the form of salary or family pension or other sources of income. However, there might be scenarios where you have received arrears of family pension or pending salary during the current fiscal year. It can happen that an income taxpayer gets a part of his profit or salary in advance or as arrears in any financial year, which increases his total income thereby increasing the payable taxes. In such a case, an application can be made and the assessing officer can grant relief to the taxpayer. To sum it up, the Income-tax Act ensures there is parity in the Income-tax slab rates, and thus, when a portion of the income received does not pertain to the current year, relief is granted so that the taxable income does not increase.
To ensure that you are not burdened with paying additional taxes, the Income-tax department provides Relief U/s 89(1). If you receive any pension or payments for the previous year, you will not be taxed on the total amount for the current year. Essentially keeping you away from paying extra taxes, because there was a delay in payment.
To avail of the benefits under Section 89(1), you would need to submit Form 10E. What is Form 10E would be the most obvious question. The details of Form 10E, along with how and why to submit the same are provided in detail below.
What is relief under section 89(1)?
When the taxpayer receives:
- Arrears of salary or
- Advance salary or
- Arrears of family pension
then such amount is taxable in the Financial Year in which it is received.
However, relief under section 89(1) is provided to reduce the additional tax burden due to delays in receiving such income.
How to calculate relief under section 89(1)?
Here are the steps to calculate relief under section 89(1) of the Income-tax Act, 1961:
- Calculate tax payable on total income including arrears in the year in which it is received.
- Calculate tax payable on total income excluding arrears in the year in which it is received.
- Calculate the difference between (1) and (2).
- Calculate tax payable on total income of the year to which arrears are related, including arrears.
- Calculate tax payable on total income of the year to which arrears are related, excluding arrears.
- Calculate the difference between (4) and (5).
- The amount of relief will be the excess amount of (3) over (6). No relief shall be allowed if the amount of (6) is more than the amount in (3).
Example of how to calculate relief under section 89(1)
Mr A has a total income of Rs. 11,50,000/- for Financial Year 2022-23 (Assessment Year 2023-24) and received arrears of Rs. 2,50,000/- for Financial Year 2021-12 (Assessment Year 2022-23). The total income for Financial Year 2011-12 is Rs. 5,50,000/-.
The relief will be calculated as follows:
- Tax on total income of Rs. 14,00,000/- (Rs. 11,50,000+Rs. 2,50,000) including arrears for F.Y. 2021-22 is Rs. 2,41,800/- (as per rates applicable for F.Y. 2022-23 i.e. A.Y. 2023-24).
- Tax on total income of Rs. 11,50,000/- excluding arrears for F.Y. 2021-22 is Rs. 163,800/-
- The difference between (1) and (2) is Rs. 78,000/-.
- Tax on total income of Rs. 8,00,000/- (Rs. 5,50,000+Rs. 2,50,000) including arrears for F.Y. 2021-22 is Rs. 75,400/- (as per rates applicable for F.Y. 2021-22 i.e A.Y. 2022-23).
- Tax on total income of Rs. 5,50,000/- excluding arrears for F.Y. 2021-22 is Rs. 23,400/- (as per rates applicable for F.Y. 2021-22 i.e A.Y. 2022-23).
- The difference between (4) and (5) is 52,000/-
- The amount of relief will be Rs. 26,000/- [excess amount of (3) over (6)]
What is Form 10E?
For claiming relief under section 89(1) 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 most 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 original or revised Income Tax returns. So if you failed to file Form 10E before filing of original return, you can still file Form 10E and file a revised return to get relief u/s 89.
How to submit Form 10E?
Click here to know about the procedure to fill out Form 10E.
Relief under section 89(1) for arrears of salary is available in the following cases:
- Salary received in advance or as arrears
- Family pension received late as arrears
- More than 12 months' salary received in one financial year
- Commuted pension
- The compensation received from the employer as compensation for termination of employment
The tax relief is an effective measure to ensure that taxpayers are not troubled with additional taxes due to arrears. You need to submit form 10E to avoid paying additional taxes that you might otherwise have to. It must also be noted that the relief is only allowed if the tax liability of the taxpayer increases. If there is no increase in the liability, no relief is provided.
Also, it has to be remembered, if an employee has received a VRS compensation, there is no relief provided under section 89, if the exemption has been claimed by the taxpayer under section 10(10C) for a VRS. Only one of these exemptions can be claimed and the two cannot be clubbed together.
Is it mandatory to file Form 10E?
If you have received payments as arrears either for salary or pension, Section 89(1) would help you in avoiding extra taxes. And for that to happen, you need to submit Form 10E. Thus, it is mandatory to file Form 10E, only if you seek benefits u/s 89(1).
How can I submit Form 10E?
You can submit Form 10E on the income tax e-filing website. For detailed steps click here.
Would I be taxed on arrears?
If you file Form 10E with the appropriate details, you will not be charged with any additional taxes due to arrears. The assessing officer can grant an exemption.
Do I need to attach a copy of Form 10E?
No, a copy of form 10E does not need to be attached to the tax return. The form has to be filled out online and submitted online, but it is always advisable to keep the document in records safely.