Reduce your income tax outgo by claiming Section 89 tax relief and filing Form 10E if you received arrears of salary However if you want to claim this relief then do note that there are certain conditions
After a good increment, most salaried individuals eagerly wait for their past arrears to be credited. However, there is a catch, as your income also goes up and paying tax on this arrear can increase your net tax outgo in the year you receive the arrears. This is because, income tax on salary income is levied either on a due or receipt basis, whichever is earlier. So, the sum of money (arrears) you received in the current financial year pertains to past years. So, this can artificially inflate your present year's income, which may result in higher payment of income tax. To save you from this, the tax laws allow you to claim tax relief under Section 89.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
How does Section 89 relief help you from paying a higher tax due to arrears of salary?
Salary is charged to tax in the hands of an individual on a due or receipt basis, whichever is earlier. "However, if you have received a certain sum of money in the current year which is about the previous years, then you may have to pay higher taxes on such receipts as a result of an increase in tax rates. To resolve this genuine hardship, Section 89(1) of the Income Tax Act, 1961, comes to the rescue for an individual," says CA (Dr.) Suresh Surana.When can you claim tax relief under Section 89?
Tax relief under Section 89 makes sure that you do not pay any extra tax due to delay in payment of salary (i.e. arrears) and other specified payments. However, this relief is only given if you have received certain specified types of income. According to the Income Tax Department, "Why has my claim of relief under Section 89 relating to arrears or advance of any sum in nature of salary not been granted by the Income Tax Department? Relief under section 89 is available to a resident individual if he has received the following:Salary or family pension in arrears or in advance.Gratuity over exemption under section 10(10) (ii) (iii).Compensation on termination of employment.Commuted pension over exemption under section 10(10A) (i)."
What are the conditions under which tax relief under Section 89 can be claimed?
Experts say that tax relief is only given if the tax payable is higher due to the receipt of such arrears. "If there is no extra tax liability, tax relief is not allowed," says CA Abhishek Soni, co-founder, of Tax2Win.There is also the requirement of filing Form 10E in order to claim tax relief under section 89. "A working of relief under Section 89 has to be submitted online by filing statutory form 10E through the e-filing portal," said the Income Tax Department.
Form 10E needs to be filed by the ITR filing deadline
Mihir Tanna, Associate Director- direct tax, S.K Patodia & Associates LLP, a CA firm explains that Form 10E needs to be filed to claim a tax relief under Section 89. "The tax department in its manual for Form 10E, advises to file it before filing the income tax return deadline. As income tax rules don't specify it, it is not compulsory but while processing ITR, the income tax system is not likely to give relief without Form 10E," says Tanna.
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"To claim relief under Section 89, you must submit Form 10E online on the Income Tax portal before filing ITR. Remember, your salary slips serve as proof of receipt of arrears, therefore, should be kept safe," says Soni of Tax2Win.
Check what steps you need to follow to claim relief under Section 89
According to Surana, rule 21A of the Income Tax Rules, 1962, prescribes the method of computing relief under Section 89(1).According to Surana, the amount of relief under Section 89 (1) can be determined by following the steps:
Steps
Particulars
Step 1
Determine the tax payable on his total income (including arrears) for the year in which the same is received.
Step 2
Determine the tax payable on his total income (excluding arrears) for the year in which the same is received.
Step 3
Calculate the amount of tax payable for the current year which is arising only because of such arrears. i.e. Step1 – Step 2
Step 4
Determine the tax payable on his total income (including arrears) for the year to which the arrears are related.
Step 5
Determine the tax payable on his total income (excluding arrears) for the year to which the arrears are related.
Step 6
Calculate the amount of tax payable for the year to which arrears are related which would arise only because of such arrears. i.e. Step 4 – Step 5
Step 7
Excess tax payable in the current year (as computed in Step 3) over tax computed for the year to which arrears are related (as computed in Step 6) can be claimed as relief under section 89
Source: CA (Dr. Suresh Surana)
Soni shares an example to show how the workings are made for claiming Section 89 tax relief: The example assumes income of the taxpayer to be Rs 15 lakh in FY 2022-23. In the same year this taxpayer received Rs 3 lakh as arrears of salary. For FY 2021-2022 the taxpayer's total income was Rs 6 lakh.
Source: Tax2Win"Relief under section 89 = (X) - (Y) = Rs 93,600 - 62,400= 31,200," says Soni.
"Arrears of salary received during the previous year has to be offered as income in that year’s ITR and accordingly tax needs to be paid," says CA Ashish Niraj, Partner, A S N & Company, Chartered Accountants.
“If arrear wasn't due to the taxpayer due to uncertainty of receipt and the taxpayer’s Form 16 doesn't show the amount then the taxpayer need not show this in his/her ITR and offer it for tax. In the next financial year if it is due then the taxpayer should show this in his/her ITR, offer it to tax and claim section 89 relief, irrespective of the fact whether the said arrear was received or not," says Tanna.
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This story originally appeared on: India Times - Author:Faqs of Insurances
