Understanding tax relief on arrears under Section 89(1) | Fusion - WeRIndia

In India, receiving arrears or additional payments can increase your tax liability. This occurs because these amounts are added to your total income for the current financial year.

Consequently, the higher income may push you into a higher tax bracket, resulting in increased tax liability.

Arrears can include salary, pension, rent, or other types of income that were delayed. When these arrears are finally paid, they are treated as taxable income in the year they are received.

For instance, if an employee receives arrears in 2023 for the salary of 2022, they may have to pay a higher tax rate on those arrears in 2023.

To mitigate this, taxpayers can claim relief under Section 89(1) of the Income Tax Act, 1961. This provision helps reduce the additional tax burden due to arrears.

Section 89(1) offers relief to employees who receive salary arrears in a financial year that relates to previous years.

It allows individuals to compute their tax liability by considering the total income of the year in which arrears are received and the relief for previous years.

To calculate the relief under Section 89(1):

• Calculate the tax liability for the year in which arrears are received.
• Calculate the tax liability for the year to which the arrears relate as if they were received in that year.
• The difference between the two tax liabilities is the relief amount available.

To claim this relief, employees must file Form 10E before filing their Income Tax Return (ITR).

Section 89(1) intends to prevent difficulties arising from a higher tax liability from accumulated income in a single year.

By claiming relief, individuals ensure they are taxed at the average rate applicable to their income over the relevant years.

Here are the Key Points related to Form 10E:

• Form 10E is used to claim relief under Section 89 for arrears or advance sums like salary.
• There is no need to download the form. The submission can be done online through the e-filing portal.
• File Form 10E before filing your Income Tax Return.
• The form is mandatory for those who want to claim tax relief on arrears/advance income.
• If taxpayers fail to file Form 10 but claim relief under Section 89, then the relief claimed will not be allowed even though their ITR is processed.

If disallowed, the IT department will communicate this through an intimation under Section 143(1) after processing your ITR.

By understanding and utilizing Section 89(1), taxpayers can effectively manage their tax liabilities, ensuring a fairer tax assessment on their arrears or additional income.

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