As a salaried individual, if you receive any advance salary or arrears, you may have to pay taxes on the total amount received. The Income Tax Department, however, protects you from any additional tax liability due to any delay in receiving income under Section 89(1). In other words, if you receive any portion of your salary in the form of arrears, you can claim tax saving under Section 89(1) on the same via Form 10E filing.
Under Section 89(1), you can avail tax relief through recalculation of tax for both the years (in which the arrears are received, and the arrears pertain). The tax liability is adjusted after assuming that the arrears were received in the same year, they were due.
- What is Form 10E?
It is mandatory to fill out Form 10E if you want to claim tax relief under Section 89(1) of the Income Tax Act 1961. Under Section 89(1) of the Act, you are eligible to claim tax relief for delayed salary received in the form of arrears. Any arrears received are reflected in Part B of your Form 16.
Form 10E is required for furnishing particulars of received income under Section 192(2A) and can be filed by a Government servant or any employee working in a company, co-operative society, university, local authority, institution, association, or body.
- Understanding Eligibility for Relief under Section 89(1)
In a situation where you have received your pension or salary in arrears or advance, then Rule 21A guides you on how to calculate your tax relief. We can help you to understand the calculation better with the help of the following steps:
Step 1: Calculate the tax on your total income for the current financial year (this will include the amount received through arrears or advance salary). Let’s call this Amount 1.
Step 2: Now, compute the tax payable on your income without adding the arrears or advance. This is Amount 2.
Step 3: Find out the difference between the two amounts (Amount 1 – Amount 2).
Step 4: Calculate the tax on your income for the year when the arrears arose (do not include the arrears). We can call this Amount 3.
Step 5: For the same year, calculate the tax payable by adding the arrears or advance amount to your income. This is Amount 4.
Step 6: Subtract the two Amounts (Amount 4 – Amount 3).
Step 7: Only if the amount in Step 3 is more than that in Step 6, a taxpayer can claim relief under Section 89(1).
Prepared by Maheshwari K.E