Section 89(1) of the Income Tax Act, 1961:
Understanding Relief for Arrears or Advance Salary
As per the Income Tax Act, an individual is required to pay tax on his or her income earned in a financial year. However, there may be cases where an employee has received arrears of salary or advance salary, which pertains to a previous financial year. In such cases, the tax liability of the employee can increase significantly due to the slab rates of taxation. To provide relief in such cases, the Income Tax Act, 1961, has a provision under Section 89(1). In this blog, we will discuss the provisions of Section 89(1) in detail.
What is Section 89(1) of the Income Tax Act, 1961?
Section 89(1) of the Income Tax Act, 1961 provides relief to an employee who has received arrears of salary or advance salary in a financial year, which relates to a previous financial year. The section provides relief by computing the tax payable on the total income of the employee in the financial year in which the arrears or advance salary is received, as if such income had been received in the year or years to which it relates.
Conditions to be fulfilled for claiming relief under Section 89(1)
To claim relief under Section 89(1), an employee has to fulfil the following conditions:
- The employee must have received arrears or advance salary in a financial year, which pertains to a previous financial year.
- The employee should have received a salary or a pension in the financial year in which the arrears or advance salary is received.
- The employee should furnish Form 10E to his or her employer for the computation of relief under Section 89(1).
Calculation of Relief under Section 89(1) The relief under Section 89(1) is calculated by dividing the arrears or advance salary by the number of years to which it relates. The amount so arrived at is added to the income of the employee for the financial year in which the arrears or advance salary is received. The tax payable on the total income is then calculated as per the slab rates applicable for the financial year in which the arrears or advance salary is received.
Example Suppose an employee received arrears of salary of Rs 5,00,000 in the financial year 2022-23, which pertains to the financial year 2019-20. The employee’s income for the financial year 2022-23, excluding the arrears, is Rs 6,00,000. The relief under Section 89(1) will be calculated as follows:
Arrears of Salary = Rs 5,00,000
Number of Years to which it relates = 2 (Financial Year 2019-20 and 2020-21)
Arrears divided by Number of Years = Rs 2,50,000
Total Income for Financial Year 2022-23 = Rs 8,50,000 (Rs 6,00,000 + Rs 2,50,000)
Tax payable on Total Income = Rs 22,500 (As per slab rates applicable for Financial Year 2022-23)
Additional Information on Section 89(1) of Income Tax Act, 1961
Apart from the basic provisions of Section 89(1) discussed above, there are some additional details and exceptions that taxpayers should keep in mind while claiming relief under this section.
- The relief under Section 89(1) can be claimed only if the total income of the employee for the financial year in which the arrears or advance salary is received is higher than the total income of the employee in the year or years to which the arrears or advance salary pertains.
- The relief under Section 89(1) cannot be claimed by employees who have opted for the new tax regime under section 115BAC.
- The relief under Section 89(1) can be claimed only by employees who have received arrears or advance salary from a previous employer. If the arrears or advance salary is received from the current employer, the relief can be claimed only if the employee has received Form 16 from the current employer for the previous years to which the arrears or advance salary pertains.
- The relief under Section 89(1) can be claimed only if the arrears or advance salary is received in one lump sum in a financial year. If the arrears or advance salary is received in instalments over multiple years, the relief cannot be claimed.
- The relief under Section 89(1) is not automatic and has to be claimed by the employee by filing Form 10E with the employer. The form should be filed before filing the income tax return for the financial year in which the arrears or advance salary is received.
- The relief under Section 89(1) can be claimed only if the arrears or advance salary pertains to salary income, which is taxable under the head “Salaries” in the Income Tax Act. If the arrears or advance salary pertains to income from any other source, such as capital gains, business income, or income from house property, the relief cannot be claimed.
- The relief under Section 89(1) is calculated on the basis of the tax rates and slabs applicable in the year or years to which the arrears or advance salary pertains. This means that the relief can result in a significant reduction in the tax liability of the employee, especially if the arrears or advance salary pertains to a year when the tax rates were lower.
- The relief under Section 89(1) can also be claimed in cases where the employee receives compensation or damages for loss of employment, wrongful termination, or discrimination. However, the relief can be claimed only if the compensation or damages are received in a lump sum in a financial year, and not in instalments.
- Taxpayers should ensure that they have all the necessary documents and details related to the arrears or advance salary, such as the year or years to which the arrears or advance salary pertains, the amount received, and the tax deducted at source (TDS). This information is required to calculate the relief under Section 89(1) accurately.
Conclusion
In conclusion, Section 89(1) of the Income Tax Act, 1961 is a beneficial provision that provides relief to employees who receive arrears or advance salary in a financial year, which pertains to a previous financial year. Taxpayers should ensure that they comply with all the conditions and file Form 10E to claim the relief and reduce their tax liability.
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