Relief under section 89 | Taxability in case of Arrear of Salary

Wages are usually paid on time but it is not uncommon for an employee to receive a portion of his or her salary in the form of a deficit or prepaid pay at the time of employment. In that case tax exemptions / s 89 are permitted under the Income Tax Act, 1961 as at that time the auditor may pay higher taxes because the arrear / premature income is taxable in the year of the same acquisition and not in the actual year. The difference in tax liability for the relevant year and year of receipts may be due to changes in slab rates. For this reason, the provision of service u / s 89 is entered.

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1. Section 89(1) – Relief of Salary

Tax is calculated on the total taxpayer income earned or received during the year. If the examiner receives any ‘arrear or early part of income’, or receives a family pension on arrears, under the Income Tax Act it is permissible to claim tax exemption under section 89 (1). For taxpayers, Tax debts for the Financial Year are calculated from the revenue earned for that year. In some cases, income includes debts (prepaid payments in the current year). In general, tax rates increase over time which means that the inspector may pay higher taxes in such a case. However, the Income Tax Act provides for the freedom of examination in those cases s / s 89 (1).

2. Relief under Section 89 (1)

Exemptions under section 89 (1) in respect of arrears are available in the following cases:

  • Earned income early or as a backlog
  • Freedom
  • Termination Compensation
  • Pension Conversion

3. Calculating Relief under Section 89 (1)

Some steps must be followed to calculate the benefit under section 89 (1). The steps are as follows:

  • Step 1: The taxpayer must receive the tax payable on his income including the arrears after the last year in which the same is received. (Example: X)
  • Step 2: The taxpayer must receive the tax payable on all his money except the arrears. (Example: Y)
  • Step 3: Subtract the value obtained in step 1 from the value obtained in step 2. (e.g., A-B) and save the result value as Z.
  • Step 4: Earn the tax payable on the total income (including debts) per year related to arrears. (Example: "A")
  • Step 5: Earn the tax payable on the total income (excluding arrears) of the year related to arrears. (Example: "B")
  • Step 6: Subtract the value obtained in step 5 from the value obtained in step 4 (i.e., A - B). (Example: "C").
  • Exceeding the tax listed in step 3 in addition to the tax listed in step 7 is the exemption rate allowed under section 89. If the tax in step 3 is less than the tax listed in step 7 the taxpayer will not qualify for any exemption.

As per the Income Tax Act 1961, Income Tax Section 89 (1) a taxpayer may receive a wage exemption commensurate with previous year's profits. Section 89 (1) stands out from the 6th Central Government Remuneration Commission. Previously, this category was only used to supplement gratuity income.

4. Gratuity Payment

Tax exemptions are only available if the debt is incurred in respect of previous examiner services extended for a period of not less than 5 years. In other words, no exemption is granted if the service period is less than 5 years. The amount of tax exemption is calculated as follows:Where the Gratuity paid in respect of past services of 15 Years or more

  • Step 1: Calculate the total income tax and enter the amount in the credit year and calculate the tax rate (i.e.) (Tax Amount / Total Income) x 100
  • Step 2: Taxes will be calculated free of charge based on the average tax rate calculated in step 1.
  • Step 3: Tax debt should be calculated by adding 1/3 of each annual income to the previous 3 years and then calculating the average tax for each tax. year separately.
  • Step 4: Now, calculate the average of the 3 averages listed in step 3 above and calculate the free tax on that average rate.
  • Step 5: The excess, if any, of the debt tax listed in step 2 over step 4 will be a valid benefit under section 89.
Where Gratuity is paid in respect of past services of 5 years or more but less than 15 years

The calculation method is the same except that in step 3 the calculation of the tax rate will be taken as 2 instead of 3 and thus 1/2 of the proceeds will be added to the total previous income. 2 years instead of 3 years.

5. Compensation on Termination of Employment

Where the payment process is natural for Tax Compensation Available to the Employer or Former Employer on time or in connection with Termination of Employment. Tax exemptions will only be available if the conditions listed below are met:

  • Compensation is received after continuous services of not less than 3 years.
  • The expired part of the lease term is also not less than 3 years.

The procedure for calculating tax exemptions is the same as that given above, i.e. the compiler fee for services rendered for a period of 15 years or more.

6. Commutation of Pension

The procedure for calculating tax exemption is the same as that given above, i.e. the amount paid to the inspector for services rendered for a period of 15 years or more.

7. Other Cases

In the case of a payment that falls under any other circumstances, the CBD will consider the circumstances of each case and allow for that tax exemption as it deems appropriate.

8. Section 89(1) – Filing Form 10E

The Income Tax Department has made it mandatory to file Form 10E if a taxpayer wants to apply for an exemption under Section 89 (1). Where the inspector is a public servant of a company, local authorities, a co-operative , institution, university, organization or body is entitled to a tax advantage under section 89. instead of the employer. In terms of Section 89 (1), tax exemptions are provided by reclassifying the tax for both years, the year in which the arrears are received and the related year in arrears. Taxes are adjusted considering the arrears were received in the due year. Prescribed steps must be followed to file Form 10E. These are:

  • Step 1: Go to https://incometaxidiaefiling.gov.in/ and sign in with ‘your User ID’ (i.e., PAN), ‘DOB’ and ‘Password’.
  • Step 2: Click the 'File' tab and select 'Prepare and Submit Online Form (Without ITR)' in the drop-down menu.
  • Step 3: Select 'Form 10E' from the drop-down menu.
  • Step 4: Complete the relevant Exam Year and then press the 'Continue' button.
  • Step 5: The screenshot below containing the instructions for e-file Form 10E will be available.
  • Step 6: Click on each of the blue tabs and fill in the relevant details.
  • Step 7: Click on 'Submit' after completion to complete the process.

In the event that the taxpayer is unable to complete the entire process at once, it is possible to save the completed information by clicking the ‘Save Draft’ button at the bottom of the screen and complete it at any time later. In the event that the examiner has kept the Form 10E draft, it can be completed later by following the same procedure as mentioned above.

9. Voluntary Retirement Scheme

No tax exemption will be granted in respect of any amount earned by the manager during voluntary retirement / termination of service, in accordance with any voluntary retirement plans or plans or deductions, if exemptions in respect of any service. the amount received or received for such voluntary retirement or termination of employment or voluntary separation is compensated for employment compensation under section 10 (10C) for that year, or any other year of assessment.

10. Form 10E

The Income Tax Form 10E has been reproduced below for use:

Frequently Asked Questions

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Due to past year's salary arrears I have to pay additional income tax. Is there any solution to the distribution of arrears if previous year ITR is filed?

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To avoid paying high taxes on arrears, section 89 is introduced. If the total annual income includes arrears, then you can get assistance under section 89 (1).


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What are the methods to save tax on arrears?

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Section 89 (1) of the Income Tax Act, 1961 states that if an inspector's remuneration has been paid in arrears from the previous year, the examiner may apply for exemption in terms of section 89 (1).


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Can I claim relief for an arrear of past years under section 89 if it is not mentioned in form 16 and shown as gross income of the current year?

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If relief u / s 89 is not mentioned in Form 16 , there is nothing to worry about, you can still seek relief by providing all the details related to the outstanding debt back at the time of submission of the refund.


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Is it necessary to file previous year's income tax return to get the benefit of section 89 for arrear salary received?

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There is no such requirement for an IT department. All that is required are the documents and details of the previous year's income on how the arrears are obtained for compensation under section 89.


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Is the filing of an individual income tax return mandatory to claim relief u/s 89 of the Income Tax Act?

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To seek exemption under section 89 (1), the completion of Form 10E and the refund of income tax is compulsory.


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What is “Less: Rebate u/s 87A” reflect in salary slip as per India income tax?

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Discount under section 87A means a tax rebate available to residents whose total income does not exceed Rs.5 lakhs. For this discount no additional fees are required


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Can I claim relief under Section 89 of the Income Tax Act for HRA arrears?

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The HRA is part of the payroll and debt arrears under Section 89, which is why, HRA backlogs can be claimed under this section.


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How should I get benefit of tax exemption for the arrears of family pension received on 27 March relating to previous three financial years?

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To get the tax benefits you owe, individuals need to complete a Form 10E . Form 10E is a requirement under section 89 to apply for a deferred deduction including a family pension tax.


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Is relief u/s 89 available for advance salary received?

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Yes, Relief u / s 89 of the Income Tax Act can be claimed for any portion of income as a previous salary. To understand how to calculate tax revenue under section 89 please refer to the detailed calculation described above.


CEO Krishna Gopal

Krishna Gopal Varshney is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Myitronline.com. Myitronline is amongst the top emerging startups of Asia and authorized ERI by the Income Tax Department. A dedicated and tireless Expert Service Provider for the clients seeking tax filing assistance and all other essential requirements associated with Business/Professional establishment. Connect to us and let us give the Best Support to make you a Success. ”

Krishna Gopal Varshney
Co-founder & CEO