How to Claim Section 89(1) Relief for Salary Arrears Received in FY 2024-25?

Introduction to Arrears

Arrears of salary refer to salary received in a later year than it was due, often due to retrospective revisions (e.g., pay commission revisions, promotions, etc.). These arrears can push the total income into a higher slab, increasing your tax liability disproportionately.

To offer relief in such cases, Section 89(1) of the Income-tax Act provides tax relief for income received in arrears or in advance.

What is Section 89(1) Relief?

This section enables you to calculate the tax liability as if the arrears had been taxed in the year(s) to which they pertain. The goal is to ensure fair taxation.

Your employer will provide you with a statement when you get arrears. This statement should reflect the period for which the arrears are being paid. It should also show the amount of arrears allocated for each year. This breakdown is important for correctly reporting the arrears in your Income Tax Return (ITR) and Form 10E.

What is Form 10E?

Form 10E is the form you must submit online to claim relief under Section 89(1). Filing this form is mandatory before filing your ITR, if you want to claim this relief.

Who should file Form 10E?

Any taxpayer receiving:

• Salary arrears
• Advance salary
• Gratuity for past services (if it spans over multiple years)
• Commuted pension
• Compensation on termination of employment

How to File Form 10E (Step-by-step on the Income Tax Portal)

1. Log in to the Income Tax e-Filing Portal
2. Go to e-File > Income Tax Forms > File Income Tax Forms
3. Search for Form 10E under the list of forms.
4. Fill in:
5. Basic details
6. Details of income received in arrears (like year to which it belongs, amount, etc.)
7. Tax calculation of the year(s) to which the income belongs and current year
8. Submit the form electronically.

Important: If you claim relief under Section 89(1) in your ITR, you must file Form 10E. Otherwise, the CPC (Central Processing Centre) may reject your relief claim.

Example Scenario

You received ₹1,00,000 in arrears for FY 2022–23 in the current financial year, i.e., FY 2024–25.

Step 1: Tax Calculation Without Arrears (for FY 2022–23)

• Salary without arrears = ₹4,00,000.
• Tax without arrears = ₹10,000.

Step 2: Tax Calculation With Arrears (for FY 2022–23)

• Salary with arrears = ₹4,00,000 + ₹1,00,000 = ₹5,00,000.
• Tax with arrears = ₹20,000.

Step 3: Tax Difference for FY 2022–23

• Tax difference = ₹20,000 (with arrears) – ₹10,000 (without arrears) = ₹10,000.

Step 4: Tax Calculation for Current FY 2024–25 (with ₹1,00,000 arrears):

• Assume other income in FY 2024–25 = ₹5,00,000.
• Taxable income = ₹5,00,000 (current income) + ₹1,00,000 (arrears) = ₹6,00,000.
• Tax for current year = ₹60,000*

(*Simplified tax amount only for explanation)

Step 5: Tax Calculation for Current Year (Without Arrears)

• Taxable income = ₹5,00,000 (excluding arrears).
• Tax for current year = ₹40,000

Step 6: Relief Calculation

Tax difference for FY 2024–25 (current year) = ₹60,000 – ₹40,000 = ₹20,000.

Final Relief Calculation:

Total relief under Section 89(1) = The excess of amount derived in Step 6 over Step 3. i.e., ₹20,000 – ₹10,000 = ₹10,000.

If you have any doubts regarding the filing of Form 10E, consult your Chartered Accountant. This will help in accurate filing and avoiding any potential errors.