How to Save Tax on Salary Arrears?

• 11th Mar 2021
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As a rule, income tax applies to your total income earned or received in a financial year. However, there may be cases where you would have earned the income in another year and received it in a different financial year or got an advance salary. This income could either be salary, family pension, or any other source of earning. Such situations could impact your tax liability for the particular financial year. However, it is possible to save tax on salary arrears by availing benefits under Section 89(1).

Here is everything you need to know on how to save tax on salary arrears:

What is the relief offered under Section 89(1)?

If you receive:

• Arrears of salary
• Advance salary
• Arrears of family pension

The amount is taxable in the financial year it is received. However, Section 89(1) offers you the benefit to reduce your tax burden as per your salary arrears by following certain steps and fulfilling specific formalities.

How to calculate relief under Section 89(1) on salary arrears?

• Step 1: Ascertain your tax payable on the total income, inclusive of the additional salary, arrears, or compensations, specifically in the financial year it is received.
• Step 2: Calculate the tax payable on your total income, apart from all the additional money, in the year it is received. Now, subtract the arrear from the salary figure received (comprising the arrears). The total salary, in this case, is mentioned in your Form 16. Once you know the sum after arrear, you have to calculate the tax on the same.
• Step 3: Calculate the sum difference between Step 1 and Step 2.
• Step 4: Calculate the tax on the total income of the year to which the arrears relate. Do not include the amount of arrears in income.
• Step 5: Calculate the tax on the total income of the year to which the arrears relate. Add the amount of arrears in the income.
• Step 6: Ascertain the difference between figures of Step 4 and Step 5.
• Step 7: Tax relief under Section 89(1) is the excess sum in Step 3 over Step 6. In case the amount of Step 6 is more than Step 3, there is no relief offered.

Once you know your tax relief, you need to file Form 10E online on the income tax e-filing portal by logging in to your account.

Important things to remember when claiming for tax relief on salary arrears

• When claiming relief under Section 89(1), keep your salary slips handy since they serve as proof of receipt of arrears.
• It is mandatory for all taxpayers claiming benefits under Section 89(1) to fill and file Form 10E online. In the case of non-filing of Form 10E, the taxpayer will be issued a notice from the Income Tax Department, and the return will not be processed.
• From 10E must be filed and submitted before the filing of ITR (Income Tax Returns). For assessment year in case of arrears, the year in which the arrears are received is considered. For example, if the arrears were received in FY 2018-2019, the assessment year would be AY 2019-2020.
• Arrears are usually announced from a back date; thus, they cannot be taxed when due.
• It is not necessary to submit Form 10E in the ITR. However, it is essential to keep a record of all documents.
• The employer may ask for a confirmation of Form 10E submission. It is not mandatory to submit the form to the employer.

Salary in arrears can result in higher taxes than the actual tax liability. Being cautious and claiming tax relief correctly can help save tax on salary arrears.

- A Consumer Education Initiative series by Kotak Life