Income Tax on Arrear of Salary

Are arrears of salary taxable?​​​​

Yes . Refer Section 15(c) of Income Tax Act 1961

Video Explanation by CA Satbir Singh in Hindi

Illustration on tax treatment of arrears of salary

On 1 st January, 2018, Mr. Rajesh received arrears of salary of Rs. 2,52,000 pertaining to the years 2011-12 to 2016-17 . As per the chief accountant of the company, arrears will be charged to tax in the year of receipt since they were not taxed in the year to which they pertain to.

However, Mr. Rajesh is of the opinion that arrears pertains to different years and, hence, cannot be charged to tax in one year. As per his view, arrears are to be charged to tax in different years. Advise him in this regard and determine the year of taxability of arrears of salary.

Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis. The rule will remain same even if the arrears pertain to different years. Hence, in this case arrears of salary of Rs. 2,52,000 will be charged to tax in the year of receipt of arrears (since they were not taxed earlier). However, in this case Mr. Rajesh can claim relief under section 89 in respect of arrears of salary.

Thus  the benefit of spread over of income to the years to which it relates to can be availed for lower incidence of tax. This is called as relief under Section 89​ of the Income-tax Act.​​  It should be worked out as explained in Rule 21A of Income Tax Rules : Relief when salary is paid in arrears or in advance, etc

Where arrears of salary are paid under orders of court, the employee would be entitled to relief u/s 89.

(K.C. Joshi v Union of India (1987) 163 ITR 597(SC).

Q. I am a Govt. employee and have received arrears of salary as per recommendations of 7th pay commission. Whether I need to file any form to claim relief under Section 89 in my income-tax return?

If you want to claim relief under 89, it is mandatory to file Form 10E online on the e-filing website. Taxpayers who claim relief under Section 89 without filing Form 10E, will get notice from Income-tax Dept. stating that “The relief under Section 89 has not been allowed in your case, as the online form 10E has not been filed”. Thus, you are required to file Form 10E online before filing your income-tax return.

The relief under section 89(1) is arithmetical. It involves finding out of two rates of tax.

• The first is the rate of tax applicable to the total income including the extra amount in the year of receipt.
• The second is finding out the rate by adding the arrears to the total income of the years to which they relate.

You have to file Form No. 10E for prescribed particulars for claiming relief under section 89

Can my employer consider relief under Section 89 for the purposes of calculating the TDS from salary?​​

Yes, As per Section 192(2A) of Income Tax Act :  if you are

• Government Servant or
• An employee in a
• company or
• co-operative society or
• local authority or
• university or
• Institution or
• Association or Body.

In such a case you need to furnish Form No. 10E to your employer. ​​

Q My employer has deducted tax without allowing relief of section 89. Can I claim the relief while filing the return of income?

If the employer fails to provide relief under section 89 and deducts excess tax, then you can claim such relief in your return of income and claim refund of excess tax deducted. However, it is mandatory to file Form 10E online on the e-filing website.

Q How to file Form 10E?

Form 10E can be filed online. Login to https://incometaxindiaefiling.gov.in with your User ID and password along with the date of birth. After you log in, click on tab e-File > Income Tax Forms. On the landing page select the following options:

Form Name: Form No. 10E – Form for relief u/s 89

Assessment Year: 2018-19 (or the Relevant Assessment year)

Submission Mode: Prepare and Submit Online

Illustration on computation of relief in respect of arrears of salary

During the previous year (FY) 2017-18, Mr. Lalit (age 29 years and resident and ordinarily resident in India) received salary of Rs. 4,84,000 and arrears of bonus for the Financial year 2011- 12 amounting to Rs. 50,000. The details of taxable income are as follows :

 Taxable income for the year (FY) 2017-18, excluding arrears of bonus : Rs. 4,84,000.
 Taxable income for the year (FY) 2011-12, excluding arrears of bonus : Rs. 3,84,000.

Compute the amount of relief under section 89 from above details.

Under section 89, read with Rule 21A(2), an employee can claim relief in respect of arrears of salary. Relief can be computed in the following manner:

Step 1 : Calculate total tax liability (including surcharge and cess, if any) on the total income, including the additional salary of the previous year in which such salary is received.

Step 2 : Calculate total tax liability (including surcharge and cess, if any) on the total income, excluding the additional salary of the previous year in which such salary is received.

Step 3 : Find the difference between tax computed at (1) and (2) above.

Step 4 : Calculate total tax liability (including surcharge and cess, if any) on the total income, including the additional salary of the previous year(s) to which such salary relates to.

Step 5 : Calculate total tax liability (including surcharge and cess, if any) on the total income, excluding the additional salary of the previous year(s) to which such salary relates to.

Step 6 : Find the difference between tax computed at (4) and (5) above.

Relief under section 89 is the excess of tax computed at Step 3 over tax computed at Step 6.

No relief is available, if tax computed at Step 3 is less than tax computed at Step 6.

Considering above, relief will be computed as follows :

Computation of Total Income

Adjusted total income (ATI) is not more than Rs. 20 lakh hence AMT not applicable.

Assessee is Senior Citizen Individual and there is no Business Income in current financial year. So there is no advance tax liability according to section 207.

Due Date for filing of Return July 31, 2018

Due date extended to 31/08/2018 F.NO.225/242/2018/ITA.II DT. 26.07.2018

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