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How to Save Income Tax on Your Salary Arrears?

Receiving salary arrears but scared of taxes coming with it? Find out how to save income tax on your salary arrears with this article.

  • 5,621 Views | Updated on: Mar 20, 2024

Salary arrears are payments made to an employee for the work of previous years, typically resulting from delayed salary revisions, promotions, or retroactive changes in employment terms. These arrears can significantly impact your taxable income, potentially pushing you into higher tax brackets. However, by employing certain strategies and utilizing the provisions of the tax laws, you can effectively save income tax on your salary arrears.

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 a particular financial year. However, it is possible to save tax on salary arrears by availing benefits under Section 89(1).

This blog will discuss everything you need to know on how to save tax on salary arrears.

What is the Relief Offered Under Section 89(1)?

Section 89(1) of the ITA (Income Tax Act) 1961 provides relief to taxpayers who receive salary arrears or other income in arrears. This relief is offered to taxpayers to ensure that they are not taxed unfairly on income that they have already earned but have only received in a later year.

Your increased income could be received in the form of:

  • 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 of reducing your tax burden as per your salary arrears by following certain steps and fulfilling specific formalities.

Claiming Relief Under Section 89

To claim relief under Section 89, you must file Form 10E with the Income Tax Department. This form is available on the website of Income Tax e-filing. Forms can be filed online or offline.

The following information must be submitted in Form 10E:

  • Your PAN number
  • The amount of salary arrears or other income received in arrears<
  • The year in which the salary arrears or other income was received
  • The year to which the salary arrears or other income pertains
  • The amount of tax paid on the salary arrears or other income in the year it was received.

How to Calculate Relief Under Section 89(1) on Salary Arrears?

Calculating relief under section 89 on salary arrears has become easy with technological developments in the finance sector. It can be calculated using the following steps:

Step 1: Ascertain your tax payable on the total income, including 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 arrears, 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 to the income.

Step 6: Ascertain the difference between the 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

Features of Form 10E

Form 10E is a digital form that can be found on the e-portal of the Income Tax Department. It is used to provide details about the total income of an employee and any arrears that they have received. Features of Form 10E are:

  • E-portal of the Income Tax Department makes it simple and entirely digital to submit form 10E. Simply go to the portal, log in to your account, or if you are a new user, create an account.
  • You must choose and complete the appropriate annexure.
    Annexure I- for the arrear amount
    Annexure II- for the gratuity
    Annexure III- for the compensation received upon termination of employment.

Once Form 10E is filed, the Income Tax Department will recalculate the tax liability of the employee and adjust the tax accordingly.

Did You Know?

Form 10E is typically filed by taxpayers who receive salary arrears. Still, it can also be used to claim relief on other types of income in arrears, such as bonus payments and gratuity payments.

How to File Form 10E?

Filing Form 10E is not as tough as it may seem. With the emergence of online services, it has become extremely convenient to fill out these forms. Here are the steps to file Form 10E:

  • To file Form 10E online, you will need to log in to the e-Filing portal using your user ID and password. Once you are logged in, you will see a dashboard. On the dashboard, click on “e-File” and then “Income tax forms”. From there, select “File Income Tax Forms”.
  • On the “File Income Tax Forms” page, select Form 10E, or you can also enter “Form 10E” in the search box to find the form. Once you have found the form, select the assessment year (AY) and click on “Continue”.
  • Click on “Let us Get Started” on the instructions page. This will take you to the form. You will need to fill out the required sections of the form. Once you have filled out all of the sections, click on “Preview”.
  • On the “Preview” page, you will see a summary of the information you have entered. If you are satisfied with the information, you can click on “Proceed to e-Verify”. This will take you to the e-Verification page.
  • On the e-Verification page, you will need to verify your identity using your Aadhaar number or your PAN number and your password. Once you have successfully affirmed your identity, you will be taken to a submission page.
  • On the submission page, you will see a Transaction ID and an acknowledgement receipt number. Please keep note of these numbers for future reference. An email confirming the submission of your form will also be sent to the mobile number and email address registered with the e-Filing portal.

Important Things to Remember When Claiming Tax Relief on Salary Arrears

When claiming relief on arrears, there are several important things to remember. Here are some key pointers to consider:

  • 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 the 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 2022-2023, the assessment year would be AY 2023-2024.
  • 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.

Tax Notice for Failure to File Form 10E

Even if your income tax return was timely filed, your claim for Section 89 relief will not be considered if Form 10E is not submitted. The Income Tax Department will notify you via notification u/s 143(1) post-processing of your ITR that Section 89 relief has been denied.

Before you can make a claim for benefits under section 89(1), you must first fill out Form 10E, according to a directive from the Income Tax Department.

As a result, even though your ITR will be filed, the relief you requested under section 89(1) will not be granted if you fail to fill out this form. The Income Tax Department will send you a notice in this regard. Before filing the income tax return, this form must be submitted.

Conclusion

Claiming relief under Section 89 can significantly reduce the tax burden on salary arrears and delayed payments. By understanding the features of Form 10E, calculating tax relief accurately, remembering important points, and filing the form on time, taxpayers can ensure a smooth and compliant process. You should stay informed, follow the guidelines provided by the Income Tax Department, and consult professionals whenever necessary to make the most of the relief provisions.

Key Takeaways

  • Section 89 of the Income Tax Act 1961 provides relief to taxpayers who receive salary arrears or other income in arrears.
  • To claim relief under Section 89, you must file Form 10E with the Income Tax Department.
  • The amount of relief you can claim will depend on the difference between the tax you would have paid if you had received the arrears in the year they were earned.
  • If you do not file Form 10E, you may be issued a notice from the Income Tax Department, and your claim for relief may be denied.

FAQ

1

I have to pay the additional tax due to last year’s salary arrears. What can I do?

You can claim relief under Section 89 of the Income Tax Act. This relief will reduce the tax you have to pay on the salary arrears. You can file Form 10E to claim this relief.



2

Can I claim relief for an arrear of the past years if it is not mentioned in Form 16?

Yes, you can claim relief for an arrear of the past years, even if it is not mentioned in Form 16. You will need to provide supporting documents to prove that you received the arrears.



3

Can I claim relief for HRA arrears under Section 89?

You can claim relief for HRA arrears under Section 80GG. Since HRA arrears are not considered salary arrears, you cannot claim relief for HRA arrears under Section 89.


4

What is Form 10E & where can I file it?

Form 10E is a form that you can use to claim relief under Section 89 of the Income Tax Act. You can file Form 10E online or offline. You can find this form on the website of the Income Tax Department.

5

Which assessment year should I choose while filing Form 10E?

You should choose the assessment year in which you received the salary arrears. For example, if you received salary arrears in 2022, you should choose the assessment year 2022-2023.

6

Do I need to attach a copy of Form 10E with my tax return?

Yes, you need to attach a copy of Form 10E with your tax return. You can attach a scanned copy of Form 10E to your e-filing.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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