Reduce your income tax expenses by claiming Section 89 tax relief and filing Form 10E if you have received arrears of wages.

After a good raise, most salaried people look forward to having their previous arrears credited. However, there is a problem, as their income also increases and they have to pay tax This delay may increase your net tax expense in the year you receive the delays. This is because, income tax Salaried income tax is levied on the basis of what is owed or received, whichever comes first. Therefore, the sum of money (arrears) you received in the current tax year is from previous years. This can therefore artificially inflate your income for the current year, which may result in a higher payment of income taxTo avoid this, tax laws allow you to claim tax relief pursuant to Article 89.

How does Section 89 relief help you avoid paying higher tax due to salary arrears?

Salary is taxed in the hands of an individual based on the date of due or receipt, whichever is earlier. “However, if you have received a certain sum of money in the current year which is similar to that of previous years, you may have to pay higher tax on such income as a result of increase in tax rates. To resolve this very difficulty, Section 89(1) of the Income Tax Act, 1961 comes to the rescue of an individual,” says CA (Dr.) Suresh Surana.

When can you claim tax relief under Section 89?

Tax relief under Section 89 ensures that you do not pay any additional tax due to delay in payment of salary (i.e. arrears) and other specified payments. However, this relief is only given if you have received certain specific types of income. According to the Income Tax Department, “Why has my application for relief under Section 89 relating to arrears or advance of any sum in the form of salary not been granted by the Income Tax Department?” Relief under Section 89 is available to a resident individual if he or she has received the following:

• Late or advanced salary or family pension.
• Free of charge on exemption according to article 10(10) (ii) (iii).
• Compensation for termination of employment relationship.
• “Pension commuted by exemption under section 10(10A) (i)”.

What are the conditions under which tax relief under Section 89 can be claimed?

Experts say that tax relief is only granted if the tax payable is higher due to the collection of such arrears. “If there is no additional tax liability, tax relief is not allowed,” says CA Abhishek Soni, co-founder of Tax2Win.
There is also a requirement to file Form 10E to claim tax relief under Section 89. “The application for tax relief under Section 89 should be filed online by filing statutory Form 10E through the e-filing portal,” the Income Tax Department said.

Form 10E must be filed before the ITR filing deadline

Mihir Tanna, Associate Director direct taxSK Patodia & Associates LLP, a CA firm, explains that Form 10E must be filed to claim tax relief under Section 89. “The tax department in its manual for Form 10E, recommends filing it before the due date of filing of income tax return. Since the income tax rules do not specify it, it is not mandatory, but while processing ITR, the income tax system is unlikely to grant relief without Form 10E,” says Tanna.“To claim Section 89 relief, you need to file Form 10E online on the Income Tax portal before filing the ITR. Remember, your salary slips serve as proof of receipt of the arrears, hence, you should keep them in a safe place,” says Soni of Tax2Win.

Find out what steps you need to take to claim Section 89 relief

According to Surana, Rule 21A of the Income Tax Rules, 1962 prescribes the method for calculating relief under Section 89(1).

According to Surana, the amount of aid under Article 89(1) can be determined by following the steps below:

Source: CA (Dr. Suresh Surana)

Soni shares an example to show how the calculations are done to claim Section 89 tax relief: The example assumes that the taxpayer’s income was Rs 15 lakh in the FY 2022-23. In the same year, this taxpayer received Rs 3 lakh as salary arrears. For the FY 2021-22, the taxpayer’s total income was Rs 6 lakh.

Source: Tax2Win

“Section 89 assistance = (X) – (Y) = Rs 93,600 – 62,400 = 31,200,” says Soni.

“Arrears of salary received during the previous year should be offered as income in the ITR of that year and tax should be paid accordingly,” says CA Ashish Niraj, Partner, ASN & Company, Certified Public Accountants.

“If the taxpayer was not required to pay the arrears due to uncertainty of receipt and the taxpayer’s Form 16 does not show the amount, then the taxpayer need not show it in his ITR and submit it to the tax office. In the next financial year, if the arrears are due, then the taxpayer needs to show it in his ITR, submit it to the tax office and claim the exemption under section 89, irrespective of the fact whether the arrears were received or not,” says Tanna.