How to Claim Rebate on Salary Arrears under Section 89(1)

When employees receive salary arrears, i.e., payments that pertain to earlier years but are received in a later year, the income tax liability for the year of receipt may significantly increase. To ease this burden, the Income-tax Act provides relief under Section 89(1), allowing taxpayers to adjust the tax payable by spreading the income over the years it actually pertains to.

1. Understanding the Need for Relief

Arrears can push a taxpayer into a higher tax slab in the year of receipt, creating a tax liability that would not have existed had the income been received in the correct year. Section 89(1) ensures such undue burden is alleviated.

2. Eligibility to Claim Relief

You are eligible if:

• You receive arrears of salary, gratuity, or compensation for termination.
• The arrears pertain to earlier financial years.
• The total tax payable in the year of receipt is higher due to the arrears.

3. Step-by-Step Procedure to Claim Relief under Section 89(1)

Step 1: Compute tax liability for the year of receipt
Include arrears in total income and compute total tax payable.

Step 2: Compute tax liability without arrears
Subtract arrears from total income and calculate tax payable.

Step 3: Compute tax for the year(s) to which arrears pertain

• Add respective arrear portion to the total income of the concerned previous years.
• Compute revised tax liability for those years.

Step 4: Calculate the difference in tax

• Find the difference between tax payable with and without arrears for current year.
• Find the aggregate difference in tax for the earlier years (with and without arrears).

Step 5: Relief amount
Relief = (Tax with arrears – without arrears in current year) – (Tax difference for earlier years)

4. File Form 10E

To claim the rebate:

• Form 10E must be filed online on the Income Tax Department’s e-filing portal.
• It is mandatory before filing the Income Tax Return (ITR).
• Not filing Form 10E may result in denial of relief.

5. Points to Remember

• Maintain all salary arrear breakup details from the employer.
• Ensure correct year-wise allocation of arrears.
• File Form 10E every year you claim relief under Section 89(1).
• Relief cannot exceed the increased tax burden due to arrears.

Conclusion

The Section 89(1) rebate is a crucial relief for salaried employees receiving arrears. By correctly computing the differential tax and filing Form 10E, taxpayers can ensure fair treatment of their income and avoid unnecessary tax burdens.