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.
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 :
|Tax on income of the year 2017-18, including arrears of salary|
(income will be ( Rs 484000+ Rs 50000) =Rs. 5,34,000).
|Tax on income of the year 2017-18, excluding arrears of salary|
(income will be Rs. 4,84,000).
|Tax on income of the year 2011-12, including arrears of salary|
(income will be ( Rs 384000+50000) =Rs. 4,34,000)
|Tax on income of the year 2011-12, excluding arrears of salary|
(income will be Rs. 3,84,000).
|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)
Computation of Total Income
|Income from Salary (Chapter IV A)||534000|
|Gross Total Income||534000|
|Round off u/s 288 A||534000|
Adjusted total income (ATI) is not more than Rs. 20 lakh hence AMT not applicable.
|Tax Due (Exemption Limit Rs. 300000)||16800|
|Relief u/s 89(1)||2678|
|Round off u/s 288B||14630|
|Deposit u/s 140A||14630|
|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 Code||Date||Challan No||Bank Name & Branch||Amount|
|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 employee||VINOD BALA GUPTA|
|2.||Permanent Account Number|
|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 21A||Rs. 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 21A||Rs. 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 21A||Rs. NIL|
|(d)||Payment in commutation of pension in accordance with the provisions of sub-rule (5) of rule 21A||Rs. NIL|
|2.||Detailed particulars of payments referred to above may be given in Annexure I, II, IIA, III or IV, as the case may be||As enclosed|
|Signature of the employee|
|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 : 07/08/2018||Signature of the employee|
|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 advance||Rs. 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)
|7.||Tax computed in accordance with Table “A”|
[Brought from column 7 of table “A”]
|8.||Relief under section 89(1)|
[Indicate the difference between the amounts mentioned against items 6 and 7]
|[See item 7 of Annexure I]|
|Previous year(s)||Total income of the relevant previous year||Salary 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)]|
|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|
|Tax Payable :||19982|
|B.Tax on Total Income as per Column No. 4|
|Total Income :||384000|
|Add Arrear :||50000|
|Tax on above||24400|