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This section 89 of the Income Tax Act addresses the tax treatment of salary arrears received from a previous financial year for professionals
If you’re a professional, you might sometimes receive salaries that were previously due to you in another financial year. Sometimes, in this case, you might get pushed to a higher tax bracket just because of that added salary income.
In this article, we’re going to talk about Section 89 of the Income Tax Act, how salary arrears are treated in case they are paid in another year, and how you can also declare them to receive a tax deduction.
What is Section 89 of the Income Tax Act?
This section provides tax relief to taxpayers in India who receive income in arrears or advance to what they are owed every month. Sometimes, salaried professionals might receive payments in advance or late payments in the future from the amount originally owed to them.
Your tax liability, under normal circumstances, is calculated on the total income earned or received during a financial year. If your income for the current year includes salary arrears from a previous year, this could push you into a higher tax bracket, leading to a higher burden.
This section aims to prevent this situation by allowing you to claim a tax deduction on your salary arrears.
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Treatment of salary arrears under Section 89
This is how salary arrears are treated under this section:
- Taxes on total income with arrears: The first step is to calculate tax payable by you on the total income, including the arrears received, in that financial year.
- Taxes with arrears deducted: The second step is to calculate the tax payable on the total income excluding the income in the year of receipt. Proof for these arrears are provided by your employer, specifying the exact amount received. This amount is then deducted from the total salary as mentioned in a TDS certificate called Form 16.
CTA: What is Form 16 - Calculate the difference: Calculate the difference between the amounts from Step 1 and Step 2. This is the additional tax you would have to pay if arrears are included in your current financial year’s income.
- Taxes payable on previous years: This is applicable when the arrears you receive in this year are applicable to multiple financial years in the past. In this case, you will need to calculate the tax payable of every previous year to which the additional arrears relate. Calculating the actual tax liability for any past years for which arrears are received in the current year is also very important.
- The excess amount that is generated after these deductions are made will be the amount of tax relief allowed under section 89. If there is no excess, no relief will be admissible.
To claim a relief under these circumstances, you can file form 10E with the Income Tax department. This will allow you to recalculate your tax both for the year in which these arrears are received, and the year to which the arrears pertain.
How to file Form 10E for deductions under Section 89
Here is a step-by-step breakdown of how you can go about filling up form 10E:
- Log in to the Income Tax portal.
- Once you’re logged in, you can click on the tap named ‘E-file’ and select the option ‘Prepare & Submit Online Form (Other than ITR)’. From the drop-down, select Form 10E.
- Select the appropriate assessment year.
- The following screen will help you complete the form by yourself with prompts and tips.
Frequently Asked Questions
There is no specific deadline for filing Form 10E. However, it’s recommended to file it before submitting your Income Tax Return (ITR) for the year in which the arrears were received.
Yes, even if your employer deducted tax on the salary arrears at the time of receipt, you can still claim relief under Section 89(1) by filing Form 10E. The tax department will recalculate your tax liability and will issue a refund if applicable to your registered bank account.
No, there is no limit on the amount of arrears you can claim relief for under Section 89(1). However, the relief is calculated based on the difference in tax liability between the current year and the arrear year.
Generally, yes, as long as the arrears pertain to a previous year and were paid in the current year, you are eligible to claim relief.
For freelancers, claiming relief under Section 89(1) might be less straightforward. It’s recommended to consult a tax advisor to determine the appropriate course of action for claiming tax benefits on delayed project payments. Section 89(1) primarily applies to salaried individuals receiving income in arrears or advance.