Section 89 of the Income Tax Act, 1961, is a provision designed to offer relief to taxpayers who receive a portion of their income in arrears or in advance. This section is particularly relevant for individuals who receive salary, pension, or family pension in arrears or in advance. It aims to provide a fair taxation system by ensuring that taxpayers do not bear an additional tax burden due to the timing of their income receipt.
The Need for Section 89 Relief
Income tax is calculated on the total income earned or received during a financial year. However, there are instances when an individual may receive income for a previous year in the current year, which could potentially push them into a higher tax bracket, leading to an increased tax liability. Section 89 comes into play to mitigate this issue by allowing a recalculation of tax liability, considering the income as if it were received in the year, it was due.
Scenarios Covered Under Section 89
Section 89 relief can be claimed under various scenarios, including:
- Salary received in arrears or in advance
- Premature withdrawal from Provident Fund
- Gratuity
- Commuted value of pension
- Arrears of family pension
- Compensation on termination of employment
How to Calculate Relief Under Section 89 of the Income Tax Act
- Calculate Tax with Arrears: Find the tax on your total income, including the arrears, for the year you received them.
- Calculate Tax without Arrears: Find the tax on your total income, excluding the arrears, for the same year.
- Find Additional Tax Liability: Subtract the tax without arrears from the tax with arrears. This is the extra tax due to the arrears.
- Calculate Past Year Tax without Arrears: Find the tax on your total income for the year the arrears relate to, excluding the arrears.
- Calculate Past Year Tax with Arrears: Find the tax on your total income for the year the arrears relate to, including the arrears.
- Find Actual Tax Liability: Subtract the tax without arrears from the tax with arrears for the past year. This is the actual tax due to the arrears.
- Determine Relief Amount: The relief is the lower of the additional tax liability (Step 3) and the actual tax liability (Step 6).
Example of Relief calculation
Scenario: Mr. A received salary arrears of ` 50,000 for the financial year 2022-23 in the financial year 2024-25.
Assumptions:
- Total Taxable income FY 2024-25 (excluding arrears): ₹10,00,000
- Total Taxable income for FY 2022-23 (excluding arrears): ₹8,00,000
- Tax rates for simplicity (assuming no changes in tax slabs):
- Up to ₹ 2,50,000: Nil
- ₹2,50,001 to ₹ 5,00,000: 5%
- ₹ 5,00,001 to ₹10,00,000: 20%
- ₹10,00,000 and above : 30%
Step-by-Step Calculation
Step 1: Calculate the tax payable on the total income, including the arrears received for the FY 2024-25.
- Total income (including arrears) = ₹ 10,00,000 + ₹ 50,000 = INR 10,50,000
- Tax calculation:
- Up to ₹ 2,50,000: Nil
- ₹ 2,50,001 to ₹ 5,00,000: 5% = ₹ 12,500
- ₹ 5,00,001 to ₹10,00,000: 20% = ₹1,00,000
- ₹10,00,000 to ₹ 10,50,000: 30% = 15,000
- Total tax: ₹12,500 + ₹1,00,000 +15000 = ₹1,27,500
- Tax calculation:
Step 2: Calculate the tax payable on the total income, excluding the arrears, received for the FY 2024-25.
- Total income (excluding arrears) = INR 10,00,000
- Tax calculation:
- Up to ₹ 2,50,000: Nil
- ₹ 2,50,001 to ₹ 5,00,000: 5% = ₹ 12,500
- ₹ 5,00,001 to ₹10,00,000: 20% = ₹1,00,000
- Total tax: ₹12,500 + ₹1,00,000 = ₹1,12,500
- Tax calculation:
Step 3: Calculate the difference between Step 1 and Step 2 to determine the additional tax liability due to arrears.
- Additional tax liability: ₹ 1,27,500 – ₹ 1,12,500 = ₹ 15,000
Step 4: Calculate the tax payable on the total income of the year to which the arrears relate (FY 2022-23), excluding arrears.
- Total income (excluding arrears) = ₹ 8,00,000
- Tax calculation:
- Up to ₹ 2,50,000: Nil
- ₹ 2,50,001 to ₹ 5,00,000: 5% = ₹ 12,500
- ₹ 5,00,001 to ₹ 8,00,000: 20% = ₹ 60,000
- Total tax: ₹ 12,500 + ₹ 60,000 = ₹ 72,500
- Tax calculation:
Step 5: Calculate the tax payable on the total income of the year to which the arrears relate (FY 2022-23), including arrears.
- Total income (including arrears) ₹ 8,00,000 + ₹50,000 = ₹8,50,000
- Tax calculation:
- Up to ₹ 2,50,000: Nil
- ₹ 2,50,001 to ₹ 5,00,000: 5% = ₹ 12,500
- ₹ 5,00,001 to ₹ 8,50,000: 20% = ₹ 70,000
- Total tax: ₹ 12,500 + ₹ 70,000 = ₹ 82,500
- Tax calculation:
Step 6: Calculate the difference between Step 4 and Step 5 to determine the actual tax liability for the past year.
- Actual tax liability: ₹82,500 – ₹72,500 = ₹10,000
Step 7: Determining the Relief:
- The relief under Section 89 is the lower of the amounts calculated in Step 3 (additional tax liability for FY 2024-25) and Step 6 (actual tax liability for FY 2022-23).
- Relief amount: Lower of ₹15,000 (Step 3) and ₹10,000 (Step 6) = ₹10,000
By following these steps, Mr. A can determine that he is eligible for a relief of ₹10,000 under Section 89, ensuring he does not face an undue tax burden due to the timing of his income receipt.
Filing for Section 89 Relief
To claim relief under Section 89, taxpayers must fill out Form 10E and submit it to the Income Tax Department before filing their income tax returns. It is important to note that failing to submit Form 10E can result in the denial of the relief claim.
What is Form 10E?
If any person is eligible to get relief from tax on salary received in arrears or advance, then he/she should file Form 10E. Form 10E is required to be filled when a person wants to claim tax relief under Sec 89(1) of the Income Tax Act 1961. According to Sec 89(1), delayed salary received in arrears or family pension received in arrears is granted tax relief.
Important Things to Know About Form 10E
- Form 10E is compulsory in the case of a claim of tax relief under Section 89(1).
- Form 10E cannot be downloaded and filed offline. It is completely online to be filled and submitted on the Income Tax portal.
- Form 10E must be filed online prior to filing of the income tax return by a taxpayer.
- The salary arrears may relate to any previous financial years, but at the time of filling Form 10E, a taxpayer must select the assessment year in which he has received the arrears.
How to File Form 10E
Filing Form 10E online is straightforward. Here is a simple guide to get you through the process:
- Log In: Go to the Income Tax e-Filing portal and sign in with your PAN and password. (e-Filing portal)
- Find the Form: Click on the ‘e-file’ section and select ‘Income Tax Forms’.
- Search for Form 10E: Under ‘File Income Tax Forms’, look for Form 10E.
- Choose the Year: Select the relevant Assessment Year and click ‘Continue’.
- Fill Out the Form: Enter the required details about your income and arrears as prompted.
- Review and Save: Double-check your information, then save and submit the form.
This will ensure you are set to claim any eligible tax relief under Section 89(1).
