Income Tax on Arrear of Salary with [Video Lecture]

By | August 6, 2018
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(Last Updated On: August 7, 2018)

Income Tax on Arrear of Salary

Are arrears of salary taxable?​​​​

Yes . Refer Section 15(c) of Income Tax Act 1961

Video Explanation by CA Satbir Singh in Hindi

Illustration on tax treatment of arrears of salary

On 1 st January, 2018, Mr. Rajesh received arrears of salary of Rs. 2,52,000 pertaining to the years 2011-12 to 2016-17 . As per the chief accountant of the company, arrears will be charged to tax in the year of receipt since they were not taxed in the year to which they pertain to.

However, Mr. Rajesh is of the opinion that arrears pertains to different years and, hence, cannot be charged to tax in one year. As per his view, arrears are to be charged to tax in different years. Advise him in this regard and determine the year of taxability of arrears of salary.

Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis. The rule will remain same even if the arrears pertain to different years. Hence, in this case arrears of salary of Rs. 2,52,000 will be charged to tax in the year of receipt of arrears (since they were not taxed earlier). However, in this case Mr. Rajesh can claim relief under section 89 in respect of arrears of salary.

Thus  the benefit of spread over of income to the years to which it relates to can be availed for lower incidence of tax. This is called as relief under Section 89​ of the Income-tax Act.​​  It should be worked out as explained in Rule 21A of Income Tax Rules : Relief when salary is paid in arrears or in advance, etc

Where arrears of salary are paid under orders of court, the employee would be entitled to relief u/s 89.

(K.C. Joshi v Union of India (1987) 163 ITR 597(SC).

 

Q. I am a Govt. employee and have received arrears of salary as per recommendations of 7th pay commission. Whether I need to file any form to claim relief under Section 89 in my income-tax return?

If you want to claim relief under 89, it is mandatory to file Form 10E online on the e-filing website. Taxpayers who claim relief under Section 89 without filing Form 10E, will get notice from Income-tax Dept. stating that The relief under Section 89 has not been allowed in your case, as the online form 10E has not been filed”. Thus, you are required to file Form 10E online before filing your income-tax return.

The relief under section 89(1) is arithmetical. It involves finding out of two rates of tax.

  • The first is the rate of tax applicable to the total income including the extra amount in the year of receipt.
  • The second is finding out the rate by adding the arrears to the total income of the years to which they relate.

You have to file Form No. 10E for prescribed particulars for claiming relief under section 89

 

Can my employer consider relief under Section 89 for the purposes of calculating the TDS from salary?​​

Yes, As per Section 192(2A) of Income Tax Act :  if you are

  • Government Servant or
  • An employee in a
  • company or
  • co-operative society or
  • local authority or
  • university or
  • Institution or
  • Association or Body.

In such a case you need to furnish Form No. 10E to your employer. ​​

Q My employer has deducted tax without allowing relief of section 89. Can I claim the relief while filing the return of income?

If the employer fails to provide relief under section 89 and deducts excess tax, then you can claim such relief in your return of income and claim refund of excess tax deducted. However, it is mandatory to file Form 10E online on the e-filing website.

 

Q How to file Form 10E?

Form 10E can be filed online. Login to https://incometaxindiaefiling.gov.in with your User ID and password along with the date of birth. After you log in, click on tab e-File > Income Tax Forms. On the landing page select the following options:

Form Name: Form No. 10E – Form for relief u/s 89

Assessment Year: 2018-19 (or the Relevant Assessment year)

Submission Mode: Prepare and Submit Online

Illustration on computation of relief in respect of arrears of salary

During the previous year (FY) 2017-18, Mr. Lalit (age 29 years and resident and ordinarily resident in India) received salary of Rs. 4,84,000 and arrears of bonus for the Financial year 2011- 12 amounting to Rs. 50,000. The details of taxable income are as follows :

 Taxable income for the year (FY) 2017-18, excluding arrears of bonus : Rs. 4,84,000.
 Taxable income for the year (FY) 2011-12, excluding arrears of bonus : Rs. 3,84,000.

Compute the amount of relief under section 89 from above details.

Under section 89, read with Rule 21A(2), an employee can claim relief in respect of arrears of salary. Relief can be computed in the following manner:

Step 1 : Calculate total tax liability (including surcharge and cess, if any) on the total income, including the additional salary of the previous year in which such salary is received.

Step 2 : Calculate total tax liability (including surcharge and cess, if any) on the total income, excluding the additional salary of the previous year in which such salary is received.

Step 3 : Find the difference between tax computed at (1) and (2) above.

Step 4 : Calculate total tax liability (including surcharge and cess, if any) on the total income, including the additional salary of the previous year(s) to which such salary relates to.

Step 5 : Calculate total tax liability (including surcharge and cess, if any) on the total income, excluding the additional salary of the previous year(s) to which such salary relates to.

Step 6 : Find the difference between tax computed at (4) and (5) above.

Relief under section 89 is the excess of tax computed at Step 3 over tax computed at Step 6.

No relief is available, if tax computed at Step 3 is less than tax computed at Step 6.

Considering above, relief will be computed as follows :

Rs
Tax on income of the year 2017-18, including arrears of salary
(income will be ( Rs 484000+ Rs 50000) =Rs. 5,34,000).
Rs. 17,304
Tax on income of the year 2017-18, excluding arrears of salary
(income will be Rs. 4,84,000).
Rs. 9,476
Difference (A)Rs.7,828
Tax on income of the year 2011-12, including arrears of salary
(income will be ( Rs 384000+50000) =Rs. 4,34,000)
Rs. 25,132
Tax on income of the year 2011-12, excluding arrears of salary
(income will be Rs. 3,84,000).
Rs. 19,982/-
Difference (B)Rs. 5,150
Difference of difference (A) – (B)Rs. 2,678
Relief under section 89(1) (A)-(b)

Note : Relief under section 89(1) will amount to Nil, if (B) exceeds (A)

Rs 2678

Computation of Total Income

 

Income from Salary (Chapter IV A)534000
Salary484000
Arrear Salary50000
534000
Gross Total Income    534000
Total Income    534000
Round off u/s 288 A534000

Adjusted total income (ATI) is not more than Rs. 20 lakh hence AMT not applicable.

 

Tax Due (Exemption Limit Rs. 300000)16800
Educational Cess504
17304
Relief u/s 89(1)2678
14626
Round off u/s 288B14630
Deposit u/s 140A14630
Tax Payable0
 
Tax calculation on Normal income
Exemption Limit :300000
Tax on (500000 -Exemption Limit) @5%  = 10000
Tax on 500001 to 534000   @20%  = 6800

Assessee is Senior Citizen Individual and there is no Business Income in current financial year. So there is no advance tax liability according to section 207.

Due Date for filing of Return July 31, 2018

Due date extended to 31/08/2018 F.NO.225/242/2018/ITA.II DT. 26.07.2018

Prepaid taxes (Advance tax and Self assessment tax)
Sr.No.BSR CodeDateChallan NoBank Name & BranchAmount
1.14630
 Total   14630
FORM NO. 10E
[See rule 21AA]
Form for furnishing particulars of income under section 192(2A) for the year ending 31st March, 2018 for claiming relief under section 89(1) by a Government servant or an employee in a [company, co-operative society, local authority, university, institution, association or body]
1.Name and address of the employeeVINOD BALA GUPTA
2.Permanent Account Number
3.Residential statusResident
Particulars of income referred to in rule 21A of the Income-tax Rules,1962
during the previous year relevant to assessment year 2018-2019
1.(a)Salary received in arrears or in advance in accordance with the provisions of sub-rule (2) of rule 21ARs. 50000
 (b)Payment in the nature of gratuity in respect of past services, extending over a period of not less than 5 years in accordance with the provisions of sub-rule (3) of rule 21ARs. NIL
 (c)Payment in the nature of compensation from the employer or former employer at or in connection with termination of employment after continuous service of not less than 3 years or where the unexpired portion of term of employment is also not less than 3 years in accordance with the provisions of sub-rule (4) of rule 21ARs. NIL
 (d)Payment in commutation of pension in accordance with the provisions of sub-rule (5) of rule 21ARs. NIL
2.Detailed particulars of payments referred to above may be given in Annexure I, II, IIA, III or IV, as the case may beAs enclosed
Signature of the employee
VERIFICATION
I, VINOD BALA GUPTA ,do hereby declare that what is stated above is true to the best of my knowledge and belief.
Verified today, the 7 day of August ,2018
Place : Chandigarh
Date : 07/08/2018Signature of the employee
ANNEXURE I
ARREARS OR ADVANCE SALARY
[See item 2 of Form No.10E]
1.Total income (excluding salary received in arrears or advance)Rs. 484000
2.Salary received in arrears or advanceRs. 50000
3.Total income (as increased by salary received in arrears or advance)Rs. 534000
4.Tax on total income (as per item 3)Rs. 17304
5.Tax on total income (as per item 1)Rs. 9476
6.Tax on salary received in arrears or advance
(Difference of item 4 and 5)
Rs. 7828
7.Tax computed in accordance with Table “A”
[Brought from column 7 of table “A”]
Rs. 5150
8.Relief under section 89(1)
[Indicate the difference between the amounts mentioned against items 6 and 7]
Rs. 2678
TABLE “A”
[See item 7 of Annexure I]
Previous year(s)Total income of the relevant previous yearSalary received in arrears or advance relating to the relevant previous year as mentioned in column (1)Total Income (as increased by salary received in arrears or advance) of the relevant previous year mentioned in column (1) [Add column (2) and (3)]Tax on total income [as per column (2)]Tax on total income [as per column(4)]Difference in tax [Amount under column (6) minus amount under column (5)]
(Rs.)(Rs.)(Rs.)(Rs.)(Rs.)(Rs.)
1234567
2011-20123840005000043400019982251325150
 
A.Y. 2012-2013 (F.Y. 2011-2012)
A.Tax on total Income as per Column No. 2
Total Income :384000
Tax on Total Income :19400
Surcharge/Edu.Cess582
Tax Payable :19982
B.Tax on Total Income as per Column No. 4
Total Income :384000
Add Arrear :50000
434000
Tax on above24400
24400
Surcharge/Edu. Cess732
Tax25132

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