Introduction
In the course of employment, individuals may receive certain payments in the form of salary arrears, advance salary, gratuity, or pension arrears. These payments, when received in a lump sum, can push the taxpayer into a higher tax slab, increasing the overall tax burden for that financial year.
To provide relief in such cases, Section 89(1) of the Income Tax Act, 1961, allows taxpayers to spread out the tax impact of such income over the years to which it pertains, reducing their total tax liability. Form 10E is a mandatory declaration form that taxpayers must file to claim this relief.
This article provides a comprehensive analysis of Form 10E, its eligibility, computation, filing process, and latest updates under Indian tax laws.
Understanding Section 89(1) of the Income Tax Act
What does Section 89(1) do?
- It ensures fair taxation by redistributing the tax liability across multiple years, preventing undue tax burden in a single financial year.
- Relief is calculated by comparing the additional tax payable due to arrears/advance salary with the tax that would have been paid had the income been received in the relevant years.
Types of Income Covered Under Section 89(1)
- Salary Arrears – Received due to revised salary structure or pending increments.
- Advance Salary – Received before it was due.
- Gratuity – Received on retirement, superannuation, or termination for services exceeding 5 years.
- Pension Arrears – Received as delayed pension payments.
- Compensation on Termination – Paid upon involuntary job loss or retirement.
- Commutation of Pension – Lump sum received in place of a monthly pension.
Why is Form 10E Mandatory?
From Assessment Year 2015-16 onwards, the Income Tax Department has made it compulsory to file Form 10E before claiming relief under Section 89(1).
Without filing Form 10E, the relief will be disallowed, even if claimed in the ITR!
Eligibility Criteria for Filing Form 10E
Salaried individuals receiving salary arrears or advance salary.
Pensioners receiving arrears of pension.
Retirees receiving gratuity or compensation on termination.
Employees receiving commuted pension or VRS benefits.
Step-by-Step Guide to Filing Form 10E
Step 1: Gather Required Information
- Salary slips & arrears statements issued by the employer.
- Tax returns of previous years (if available).
- Gratuity, pension, or compensation letters.
Step 2: Log in to the Income Tax e-Filing Portal
- Go to https://www.incometax.gov.in/
- Login using PAN and password.
Step 3: Navigate to Form 10E
- Under the “e-File” menu, select “Income Tax Forms” → “File Income Tax Forms”.
- Search for Form 10E and select the relevant Assessment Year.
Step 4: Fill in the Details
- Select the nature of income (Salary arrears, Pension arrears, etc.).
- Enter the year-wise breakup of the lump sum received.
- Provide tax computation details for each year involved.
Step 5: Validate & Submit Form 10E
- Double-check entries before submission.
- Submit the form before filing ITR.
Step 6: Claim Relief in ITR
- While filing ITR, claim relief under Section 89(1) in “Schedule S” (for salary income).
How to Compute Relief Under Section 89(1)?
The tax relief is calculated using the following method:
- Compute tax payable for the current year (including arrears).
- Compute tax payable for the current year (excluding arrears).
- Find the difference between the above two tax amounts.
- Compute tax payable for past years (as if the arrears were received in those years).
- Compute the difference in tax payable for those years.
- The excess tax paid in the current year is the relief allowed under Section 89(1).
Illustration
A salaried individual receives ₹3,00,000 as salary arrears in FY 2023-24 for past three years:
| Year | Arrears (₹) | Total Income in that Year (₹) | Tax Payable Earlier (₹) | Tax Payable After Adding Arrears (₹) | Additional Tax Due to Arrears (₹) |
|---|---|---|---|---|---|
| 2020-21 | 1,00,000 | 7,00,000 | 52,000 | 67,000 | 15,000 |
| 2021-22 | 1,00,000 | 8,00,000 | 62,000 | 76,000 | 14,000 |
| 2022-23 | 1,00,000 | 9,50,000 | 77,000 | 92,000 | 15,000 |
| Total | 3,00,000 | – | – | – | 44,000 |
If the taxpayer pays an additional ₹60,000 tax in FY 2023-24 due to arrears, but only ₹44,000 tax would have been due if the arrears were received in past years, the relief under Section 89(1) = ₹60,000 – ₹44,000 = ₹16,000.
Common Errors & How to Avoid Them
Filing ITR before submitting Form 10E → Relief will be rejected.
Incorrect year-wise breakup of arrears → Leads to mismatched calculations.
Not retaining proof of arrears payments → Can cause assessment disputes.
Claiming relief under the wrong assessment year → Always select the relevant AY.
Latest Updates on Form 10E & Section 89(1) (Finance Act, 2023-24)
Relaxation for Pensioners → Simplified filing process for pensioners receiving arrears beyond 3 years.
Digital Automation in IT Portal → Form 10E now auto-calculates tax impact on arrears.
Judicial Precedents Supporting Section 89(1) Relief
CIT vs. N. S. Gopalakrishnan (2015) 377 ITR 67 (Mad HC)
- Held that Section 89(1) is a beneficial provision and must be liberally interpreted.
Ram Kumar vs. ACIT (2021) ITAT Delhi
- Relief cannot be denied merely due to a delay in Form 10E filing, if genuine arrears exist.
Conclusion
Form 10E is critical for salaried individuals and pensioners to ensure fair taxation of lump sum income like arrears and gratuity. Proper filing and timely submission can significantly reduce tax liability.
Always file Form 10E before claiming relief under Section 89(1) in the ITR. Consulting a Chartered Accountant can help avoid mistakes and maximize tax savings.
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