Salary Arrears – Taxability & Relief under Section 89(1)

Salary arrears means the outstanding salary of a previous month. There may be a revision in the Salary of an employee from retrospective effect. Further, salary may have been revised but increments can be paid at a later date. Therefore, in such cases, the differential amount paid in the subsequent period is known as salary arrears. The employer mentions it separately in the salary slips and part B of Form 16.

Example

Arjun’s salary is INR 50,000 per month. His employer raised the salary to INR 60,000 per month in April 2020 effective from March 2020. Since the salary for March 2020 would already be paid, the additional INR 10,000 should be paid in April 2020. This is called Salary Arrears.

Taxability of Salary Arrears

Arrears in salary is treated as a salary income. They are taxable in the year of receipt. However, the taxpayer can claim relief under Section 89(1). The taxpayer should report it under the head ‘Salary’ and pay tax at slab rates.

Relief under Section 89(1)

A taxpayer receiving any portion of the salary in arrears or in advance or receives profits in lieu of salary can claim relief under Sec 89(1) of the Income Tax Act.

If the total income of a taxpayer includes any past salary paid in the current financial year and the tax slab rates are different in both years, this may lead to higher tax dues. Thus, the Income Tax Act allows relief u/s 89(1) to save the taxpayer from any additional tax liability due to delay in receiving income. Moreover, the employer calculates relief under Sec 89(1) and mentions it in Part B of Form 16. Further, the employee can claim relief under Sec 89(1) by filing Form 10E on the income tax website.

Let us understand the steps to calculate tax relief with the help of an example.

Arjun’s salary is INR 6,00,000 (50,000 per month). His employer raised the salary to INR 7,20,000 (60,000 per month) in April 2020 which is effective from March 2020.

Therefore, the year of Receipt would be FY 2020-21 and the year of Accrual would be FY 2019-20. Hence, the arrears would amount to INR 10,000 for March 2020

File Form 10E

It is mandatory to file Form 10E in order to claim the benefits under section 89(1). The taxpayer needs to file this form on the income tax e filing portal.

Calculation of Tax Relief under Section 89(1) for Salary Arrears

  1. Tax Liability on total income including arrears for year of receipt

    Calculate tax liability on total income including salary arrears in year of receipt
    Year of Receipt = FY 2020-21
    Total Income (including arrears) = INR 7,30,000
    Tax Liability = INR 60,840

  2. Tax Liability on total income excluding arrears for year of receipt

    Calculate tax liability on total income excluding arrears in year of receipt
    Year of Receipt = FY 2020-21
    Total Income (excluding arrears) = INR 7,20,000
    Tax Liability = INR 58,760

  3. Difference between Step 1 & Step 2

    Calculate difference in tax liability between step 1 and step 2
    Difference in tax liability = 60,840 – 58,760 = INR 2,080

  4. Tax Liability on total income excluding arrears for year of accrual

    Calculate tax liability on total income excluding additional salary i.e. salary arrears of financial year to which arrears are related
    Year of Accrual = FY 2019-20
    Total Income (excluding arrears) = INR 6,00,000
    Tax Liability = INR 33,800

  5. Tax Liability on total income including arrears for year of accrual

    Calculate tax liability on total income including additional salary i.e. salary arrears of financial year to which arrears are related
    Year of Accrual = FY 2019-20
    Total Income (including arrears) = INR 6,10,000
    Tax Liability = INR 35,880

  6. Difference between Step 4 & Step 5

    Calculate difference between step 4 and step 5
    Difference in tax liability = 35,880 – 33,800 = INR 2,080

  7. Relief = Step 3 – Step 6

    Tax Relief u/s 89(1) = Step 3 – Step 6. If amount in step 6 is more than step 3, no tax relief is allowed
    Tax Relief = NIL

Additionally, you can calculate tax relief under Sec 89(1) by using calculator of Income Tax Department – Relief under Section 89(1)

Income Tax Notice for Non Filing of Form 10E

From the financial year 2014-15 (the assessment year 2015-16), ITD has made it mandatory to file Form 10E if you want to claim relief under section 89(1). Taxpayers who have claimed relief under section 89(1) but have not filed Form 10E have received an income tax notice from the tax department.

FAQs

How to claim tax relief on Salary Arrears under Section 89?

Arrears or Salary advance are taxable in the year of receipt. The income tax department allows tax relief u/s 89 of the Income Tax Act to save the taxpayer from additional tax burden. Thus, the employer will calculated relief u/s 89 and report in Form 16. The employee can claim such relief in the ITR.

How to save tax on Salary Arrears?

Employee who has received arrears in salary can save tax on such additional income in the following ways:
* Calculate the relief u/s 89(1)
* File Form 10E to claim relief u/s 89(1)

Got Questions? Ask Away!

  1. Hi Krishna,

    Since you are earning Salary and Capital Gains - ITR 2 will be applicable to you.
    You can check which ITR to file using Know your ITR Form tool.

    Hope this helps