There are instances where an employee may get salary arrears for any prior year or years in the current year as a consequence of pay modification. And because one’s income tax slab rate changed to a higher tax slab, the tax due for the current year could be higher.
The Income Tax is on the assessee’s total earnings or receipts from the previous year. There are instances where the employee receives payment for past dues as salary arrears in the current year.
The income tax amount the employee would be required to pay in this situation would be higher in the current year. It can be because the assessee’s tax slab rate changes to a higher tax slab due to a change in the applicable slab rates.
We can handle this issue due to the tax reduction provided by section 89. If an employee is in a higher tax bracket, it offers relief.
Section 89 of Income Tax Act
Claim the relief under Section 89 in any of the following years:
- Salary obtained in arrears or in advance.
- Premature withdrawal from Provident Fund.
- Commuted value of pension
- Arrears of family pension
- Compensation on termination of employment
Calculating relief under section 89 (1)
Step 1: We must determine the amount of tax due on the overall income, including revenue owed from the previous year.
Step 2: Determine the amount of tax due on the whole income, excluding money received in arrears. The employer gives the employee the document detailing the arrears, including the additional money. The total salary listed on the employee’s form 16 must be reduced by this amount. The tax calculation would provide us with the liability in the case of no arrears.
Step 3: Determine the variation between steps 1 and 2. The tax on the additional salary added to the total income would be this.
Step 4: Determine the amount of tax due for each prior year to which the increased arrears correspond-
- on the total income after adding the additional arrears
- on the total revenue less than the additional arrears
Step 5: Calculate the difference between the amount calculated, as per step 4. It calculates the actual tax liability for past years for which arrears obtain in the current year.
Step 6: The amount of tax relief permitted under section 89 will be equivalent to the difference between steps 3 and 5 in step 3. There won’t be any remedy acceptable if there isn’t any surplus. The employee does not need to apply for relief under section 89 if the tax calculated following step 3 is less than the tax computed in step 5.
About the Form 10 E
According to Section 89 of income tax act, an assessee is given relief for any pay, profit instead of salary, or family pension that they receive in advance or arrears within a Financial Year. The total amount of income assessed is higher than it would otherwise be; thus, this relief is given. By including details about your income on Form 10E, you can apply for this relief.
- Who can use it?
To request relief under Section 89 of Income Tax Act, 1961, all registered users on the e-Filing portal may submit information about their income in Form 10E.
- PAN and contact information are personal information
- Salary and family pension obtained in arrears – Annexure 1(Arrears)
- Salary and family pensions collected in advance – Annexure I (Advance)
- Annexes II and IIA (Gratuity) – Payment in nature of Gratuity in respect of past services
- Annexure III (Compensation) – Payment in the form of compensation from the current or former employer at or in association with the termination of work following a continuous service period of not more than three years, or if the remaining term of employment likewise has a minimum remaining service period of three years
- Annexure IV (Pension) – Payment in commutation of allowance
Form 10E has seven parts:
When submitting Form 10E, the proper annexure must be chosen based on the type of money received
- Personal Information – The basic necessary contact information for this section’s purpose.
- Annexure I (Arrears) – This section’s purpose provides general information about pay, and family pension received in arrears.
- Annexure I (Advance) – This section describes the advance salary or family pension received.
- Annexure II & IIA (Gratuity) – This section provides a general overview of gratuity payments made for previous services.
- Annexure III (Compensation) – This part comprises broad facts of income in nature of compensation from the employer or previous employer at or in connection with the termination of employment after continuous assistance of 3 years or where the unexpired portion of the term of employment is also three years.
- Annexure IV (Pension) – This section covers general information about pension payment in commutation.
- Declaration: The declaration provided by the taxpayer is in this section.
Submitting form 10E
Step 1: Enter your user ID and password to access the e-Filing portal.
Step 2: Click e-File > Income tax forms > File Income Tax Forms from your Dashboard.
Step 3: On the page (File Income Tax Forms), select Form 10E. Alternatively, you can file the form by typing Form 10E into the search bar.
Step 4: Choose the Assessment Year (AY). and press continue.
Step 5: Click Let’s Get Started on the Instructions page.
Step 6: Select the required sections to be filled, and press Continue.
Step 7: After documenting all the information, click Preview.
Step 8: After entering all the information, click Preview on the previous step’s screen.
Step 9: Go to the E-Verify website.
A success message, Transaction ID, and Acknowledgement Receipt Number will show following a successful e-Verification. Please keep in mind the Transaction ID and Acknowledgement Receipt Number. An email confirming the successful submission of your form is sent to the email address and mobile number registered with the e-Filing portal.
You should remember that receiving a VRS may be eligible for relief under section 89 of the income tax act. However, if you have already claimed the exemption under Section 10(10C) of the Income Tax Act, there will be no benefit.
You are limited to one exemption. The above details will be helpful when submitting the 10E form. Consult a Chartered Accountant or any income tax specialist if you’re still unclear. They will assist you in efficiently filing your tax return.
Is it necessary to file the previous year's income tax return to get the benefit of section 89?
There is no such requirement by the Income Tax department. Still, to claim relief under section 89 of income tax act, the necessary documentation and specifics of the income from the prior year from which received arrears are needed.
Is filing an individual income tax return mandatory to claim relief u/s 89 of the Income Tax Act?
To claim relief under section 89(1), submitting Form 10E and income tax returns is mandatory.
What is "Less: Rebate u/s 87A" reflected in the salary slip as per income tax?
Rebate under section 87A means tax rebate open to the resident individuals whose total income does not surpass Rs.5 lakhs. For this rebate, the requirement for additional income is not necessary.
Can I ask for relief under Section 89 of Income Tax Act for HRA arrears?
HRA is a component of salary. Arrears of salary are covered by Section 89, and under this section, HRA's arrears are claimed.
How should I get the benefit of tax exemption for the arrears of the family pension received on 27 March relating to the previous three financial years?
To avail of tax benefits for the arrears, individuals should file Form 10E.
Form 10E is a requirement under section 89 to claim a deduction for the arrears, including family pension arrears.
Is relief u/s 89 open for advance salary received?
Yes, relief u/s 89 of the Income Tax Act is available for receiving any portion of salary as an advance salary.