Taxation Of Pay Arrears & The Relief Provided By Section 89 Of The Income Tax Act
The amount of income tax that must be paid depends on the salary earned during an assessment year. The tax obligation may be impacted by receiving additional compensation in the form of advances or arrears. However, Section 89 of the Income Tax Act of 1961 relieves taxpayers by accounting for such increased salaries. The computations and requirements for obtaining tax relief under this clause are explained in this blog.
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According to the Income Tax Act (ITA) of 1961, salary received in arrears is considered salaried income and is taxable. However, you can pay more in taxes if you get such arrears during the current fiscal year. The Income Tax Act’s Section 89 offers taxpayers protection from these salary arrears. Continue reading to learn more about Section 89 of the ITA’s taxability and how to apply for relief.
Overview of Section 89 of the Income Tax Act
The Income Tax Act’s Section 89 relieves an individual’s wage received in advance or in arrears of any tax obligations. A portion of the wage may be paid by the employer as past dues or in advance. These types of pay include gratuities, early PF withdrawals, pay against job termination, and family pension arrears.
Essentials of Section 89 of the Income Tax Act
To be eligible for relief, Section 89’s requirements must be met.
- Salary has been received in the form of arrears or in advance.
- Within a fiscal year, pay has been received for a period of more than 12 months.
- The wage received raises the recipient’s tax obligation
Calculation of relief under Section 89(1) of the Income Tax Act, Section 89
In accordance with Section 89(1) of the Income Tax Act, a taxpayer is exempt from paying taxes on salary advances or arrears. The clause permits recalculating the compensation that an individual has been paid. This recalculation aids in updating the tax liability to the relevant financial year against the advance salary or arrears.
To determine the tax relief under Section 89(1) of the Income Tax Act, the calculations below must be made:
- Tax due in the financial year in which the excess compensation or arrears is received.
- When it is received, tax must be paid in the same fiscal year, excluding excess pay or arrears.
- Tax owed, including overtime pay or unpaid arrears from the previous fiscal year
- Tax payable in the fiscal year when it was due, excluding extra pay or arrears.
- Add ‘b’ to ‘a’ and subtract it.
- Add ‘d’ to ‘c’ and subtract it.
- Find the difference between ‘e’ and ‘f’ in terms of tax liability.
- Tax relief can be sought to the extent of the difference between them if the tax amount in Step ‘e’ is larger than that in Step ‘f’.
Let’s use an example to better understand the calculation. In addition to his additional wage, Rajeev must pay Rs 5000 in taxes for the fiscal year 2022–2023 and Rs 3500 for the same period without it. Rajeev, on the other hand, owed Rs 4500 in taxes for the 2020–2021 fiscal year, including the extra salary that was owed this year, and Rs 4000, without the extra salary. Rajeev can seek relief from the additional Rs 1000 because he would have to pay Rs 1500 this year rather than Rs 500 in the current year.
Income Tax Act, Section 89: Making a claim for relief
Section 89(1) of the Income Tax Act permits tax relief claims to be made by filing Form 10E. Before submitting income tax returns online via the official income tax filing website, the form must be completed. The Income Tax Department will invalidate a taxpayer’s tax relief, even if it is legitimate and claimable, if they fail to submit Form 10E. Additionally, the taxpayer will get notification that the relief under Section 89(1) has been denied as a result of the failure to file Form 10E.
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