Arrears of Salary taxability and relief topic has become so relevant as a lot of employees are receiving arrears of their salary which was not received either due to COVID or wrong calculation or a increment with retrospective effect or any other reason. This article will benefit all those employees who have received arrears of salary in current year and are wondering about the taxability impact.
What is arrears of salary – Arrears refer to overdue payments meant to be paid to employee. The overdue might be on account of increment from prior period or wrong calculation or paying COVID Holiday salaries to employee.
What is Arrears of Salary taxability and relief ?
As arrears of salary is received and the Total taxable income increases of employee due to which higher TDS gets deducted. However, in effect if the salary would have been received in that prior year itself then no or less tax liability incurred. In order to benefit the taxpayer, relief u/s 89 was introduced.
As per Section 89, of the Income Tax Act ” Where an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance or is in receipt, in any one financial year, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, the Assessing Officer shall, on an application made to him in this behalf, grant such relief as may be prescribed”
Calculation of Arrears of Salary taxability and relief u/s 89
Calculation of relief is as follow:
1) Compute tax total income in year of receipt (additional salary, arrears or compensations included).
2) Compute tax on total income in year of receipt (additional salary, arrears or compensation excluded).
3) Deduct point 2) from point 1)
4) Compute tax on total income of year to which arrears pertain, (additional salary, arrears or compensation excluded)
5) Compute tax on total income to which arrears pertain (additional salary, arrears or compensations included)
6) Deduct point 5) from point 4)
7) Tax Relief is positive difference between point 6) and point 3). If negative difference, then no relief available.
Refer relief u/s 89 calculator >> https://incometaxindia.gov.in/Pages/tools/relief-under-section-89.aspx# ( Please note : This calculator is though provided by Income Tax portal, but while calculating the tax, this calculator is not taking rebate under section 87A ( no tax payable if taxable income not exceeding 5,00,000 )
However, in effect benefit of rebate u/s 87A should be taken into consideration while calculation tax payable as per current period and prior period.
Income Tax form for Arrears of Salary taxability and relief u/s 89
Form 10E has to be filed online, before filing income tax return of that year to obtain the benefit of relief u/s 89.
Steps to file Income Tax form 10E for Arrears of Salary taxability and relief u/s 89
Step 1: Logon to Income Tax Portal using your PAN as ID & Password
Step 2: Go to tab “e-file” >> Income Tax Form >> File Income Tax Form
Step 3: Go to tab “Persons without Business/Professional Income” >> Select Form 10E
Step 4: Select File now, select relevant assessment year and finish filing the form online
Step 5: E – verify the form & submit the form.
Prerequisites for claiming relief on Arrears of Salary taxability and relief
- Income Tax Portal user ID & Password.
- Obtain Form – 16 & Salary slips from Employer of the year in which arrears received
- Details of Arrears of Salary received (Amount of arrears received + Year to which such amount pertains)
- Before filing any form, a cost benefit analysis has to be done and a professional opinion must be obtained for the same.
Need Expert Assistance for Arrears of Salary taxability and relief u/s 89
For expert assistance Arrears of Salary taxability and relief u/s 89, or in Udaipur and Rajasthan, reach our professionals at Tax Ledger Advisor.
Also refer other articles for us >> https://www.taxledgeradvisor.com/salaried-tax-filing/
