It is not uncommon to see people get into a frenzy during the tax filing season. Most of the times, taxpayers are not aware of their tax liabilities, which causes all the short-term chaos. Taxes can be a bit confusing or even overwhelming if you haven’t been through the season on your own, at least once. And the matters can only get worse if arrears are involved. How would arrears impact your annual income? Would it result in additional taxes? Well, there are quite a few answered questions.

What are Arrears?

Any held up payment that you ought to receive can be tagged as arrears. It can either be a salary or even a pension. For a specific financial year, if you were to receive a pension or salary in the form of arrears, how would taxes be calculated? 

Would it result in upgrading you to a higher tax slab? Or resulting in higher tax rates, thereby forcing you to pay higher taxes? Well, not necessarily. The tax laws have pondered over this long back. 

Understanding Tax Treatment U/S 89(1)

Section 89(1) is a clause that protects your interest in the case of any payments received during a fiscal year as arrears.

This section ensures that you do not have to worry about paying any additional taxes. In fact, Section 89(1) offers a relief that you can claim directly in your income tax.

So, basically, section 89(1) protects you from paying higher taxes in any particular year for a delay in receiving income actually earned in the previous years.

How is tax calculated with 89(1)?

Tax is always calculated on the income that you have earned or receive for an entire year. So, if there are some unpaid salaries or pensions from the previous year, it can increase your taxable income for the current year. 

The tax relief ensures that you do not end up paying any additional taxes if you receive some portion of your salary or pension as arrear. 

How to calculate Tax Relief with the help of Section 89(1)?

Here is a step by step guide to calculating the tax relief under Section 89(1).

1. You need to calculate your total tax liability for the current year, including the additional income (salary or pension).
2. You then need to calculate your total tax liability, excluding the additional income. It is easy to get the arrear amount since your employer or the government would have provided it in Form 16.
3. You then need to find out the difference between both the amounts.
4. You need to calculate your total tax liability for the year that you have received the arrears in, excluding the arrear amount.
5. You need to calculate your total tax liability for the year that you have received the arrears in, including the arrear amount.
6. You then need to find out the difference between both the amounts.
7. The excessive amount of step 3 over step 6 is what you are entitled to receive as the relief. 

You can then follow the standard tax filing process to include the above information and file your taxes.

What is Form 10E?

The Income Tax Department mandates all taxpayers to file Form 10E, if they wish to avail relief under Section 89(1). This mandate started in the year 2014-2015. Since there are a couple of calculations that go on behind the scenes for the relief, the Form makes things easier. 

If after 2014-15 you want to avail relief under Section 89(1) and have failed to file Form 10E, you are most likely to receive a notice from the Income Tax Department for the same.

Even though there is a mention of an additional form, one need not worry about it. The form is available online and easy enough to file.

How to File Form 10E?

The following steps will guide you to file Form 10E for a particular financial year.

• Login to the income tax official website at https://www.incometaxindiaefiling.gov.in.
• After logging in, look for e-file tab and choose the option Prepare & Submit Online Form.
• On the next screen, you would need to select Form 10E.
• Selecting the assessment year for Form 10E is the next step.
• The website will then outline a simple and straight forward step to complete filing of the form. 

The only thing that one needs to be careful of is the assessment year. The year in which you have received the arrears would qualify as the Assessment year. Since the form must be submitted online, you are not required to submit any copy of the same. 

Getting your salary or pension as arrears is not an uncommon occurrence. If you are one of those taxpayers who has received arrears, the above steps will help you receive the relief and thereby keep your worries additional taxes at bay.

FAQ:

1. Which year should I select as the assessment year?
   The financial year in which you have received the arrears is the year that you should select as the assessment year. 
   
   
2. Is it mandatory to file Form 10E?
   Yes. The Income Tax Department has made it very clear that the Form 10E must be submitted to avail relief under Section 89(1).
   
   
3. Do I need to submit a copy of the filed Form 10E?
   Form 10E is available online and filing it does the job. You do not have to save a copy of furnish the same along with your tax filing.
   
   
4. Are there any eligibility criteria?
   As long as you have received your salary or pension or even family pension as arrear, you can avail the relief.
   
   
5. Should I submit a copy of the filed Form to my employer?
   It is not mandatory to do the same. You can choose to file it along with your tax returns and avail the benefits.