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? Taxpayers who have such questions in their mind, 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 tax payer gets a part of his profit or salary in advance or as arrears in any financial year, which increases his total income thereby increase the payable taxes. In such a case, an application can be made and the assessing officer can grant a relief to the tax payer. 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, a 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 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 is 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 additional tax burden due to delay in receiving such income.
How to calculate relief under section 89(1)?
Here are the steps to calculate relief under section 89(1) of 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 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 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 on how to calculate relief under section 89(1)
Mr. A has total income of Rs. 6,00,000/- for Financial Year 2017-18 (Assessment Year 2018-19) and received arrears of Rs. 1,50,000/- for Financial Year 2011-12 (Assessment Year 2012-13). The total income for Financial Year 2011-12 is Rs. 2,00,000/-.
The relief will be calculated as follows:
- Tax on total income of Rs. 7,50,000/- (Rs. 6,00,000+Rs. 1,50,000) including arrears for F.Y. 2017-18 is Rs. 64,375/- (as per rates applicable for F.Y. 2017-18 i.e. A.Y. 2018-19).
- Tax on total income of Rs. 6,00,000/- excluding arrears for F.Y. 2016-17 is Rs. 33,475/-
- Difference between (1) and (2) is Rs. 30,900/- (as per rates applicable for F.Y. 2017-18 i.e. A.Y. 2018-19).
- Tax on total income of Rs. 3,50,000/- (Rs. 2,00,000+Rs. 1,50,000) including arrears for F.Y. 2011-12 is Rs. 17,510/- (as per rates applicable for F.Y. 2011-12 i.e A.Y. 2012-13).
- Tax on total income of Rs. 2,00,000/- excluding arrears for F.Y. 2011-12 is Rs. 2,060/- (as per rates applicable for F.Y. 2011-12 i.e A.Y. 2012-13).
- Difference between (4) and (5) is 15,450/-
- The amount of relief will be Rs. 15,450/- [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 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?
Below are the steps on how to submit Form 10E:
- Login to Income Tax e-filing account with valid credentials
- Go to e-File >> Income Tax Forms
- Under "Form Name", select "FORM NO. 10E - Form for relief u/s 89".
- Select the Assessment Year for which Form 10E is to be filed. For example, if arrears of salary is received in the Assessment Year 2018-19 (Financial Year 2017-18), select Assessment Year as 2018-19.
- 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. The selected Annexure will then be available in editable Format. For Arrears of Salary, please select Annexure-I.
- For example, Annexure-I will appear as below. Likewise other Annexures will appear. Fill the details as applicable to you and proceed further. Annexure-I is for Arrears or Advance Salary
Annexure-II is for Gratuity (Past services over 5 years but less than 15 years)
Annexure-IIA 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.
Relief under section 89(1) for arrears of salary are 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
- Compensation received from 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 tax payer 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 tax payer under section 10(10C) for a VRS. Only one of these exemptions can be claimed and the two cannot be clubbed together.
Form 10E for arrears is a simple form and does not require a lot of inputs from your end. You must file form 10E before filing for your returns. And in the event that you fail to do so, you can expect a notice from the income tax department regarding the same. if you wish to claim the benefits under Section 89(1) it is mandatory to file submit Form 10E.
The steps mentioned above will also aid you in filing your Form 10E, so that you do not have any other worries when it comes to payments that you have received as arrears. For any problems related to relied under section 89(1) for arrears of salary or for tax filing, an advise from experts can help and ensure the returns are filed properly without any issue.
- 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 of how to do the same, you can refer to the steps mentioned above.
- 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 exemption.
- Do I need to attach a copy of Form 10E?
No, a copy of form 10E does not need to be attached with the tax return. The form has to be filled online and submitted online, but it is always advisable to keep the document in records safely.