An employee may receive salary arrears for any prior year or years in the current year as a consequence of pay modification. Such arrears may result in the income tax slab rate changing to a higher tax slab.
The income tax is calculated on the assessee’s total earnings or receipts from the previous year. An employee receives payment for past dues as salary arrears in the current year.
The income tax amount the employee would be required to pay in this situation would be higher in the current year because the assessee’s tax slab rate changes to a higher tax slab due to a change in the applicable slab rates.
This issue can be handled due to the tax reduction provided by Section 89. If an employee is in a higher tax bracket, it offers relief.
Table of Contents
Section 89 of Income Tax Act
Claim the relief under Section 89 in any of the following years:
- Salary obtained in arrears or in advance
- Premature withdrawal from provident fund
- Commuted value of pension
- Arrears of family pension
- Compensation on termination of employment
Calculating relief under Section 89 (1)
Step 1: We must determine the amount of tax due on the overall income, including revenue owed from the previous year.
Step 2: Determine the amount of tax due on the whole income, excluding money received in arrears. The employer gives the employee the document detailing the arrears, including additional money. The total salary listed on the employee’s Form 16 must be reduced by this amount. The tax calculation would provide us with the liability in the case of no arrears.
Step 3: Determine the variation between Steps 1 and 2. This tax is on the additional salary added to the total income.
Step 4: Determine the amount of tax due for each prior year to which the increased arrears correspond-
- on the total income after adding the additional arrears
- on the total revenue less than the additional arrears
Step 5: Calculate the difference between the amount calculated, as per Step 4. This step calculates the actual tax liability for past years for which arrears were obtained in the current year.
Step 6: The amount of tax relief permitted under Section 89 will be equivalent to the difference between Steps 3 and 5 in Step 3. Any remedy is not acceptable if any surplus is not available. The employee does not need to apply for relief under Section 89 if the tax calculated following step 3 is less than the tax computed in Step 5.
About Form 10 E
According to Section 89 of income tax act, an assessee is given relief for any pay, profit instead of salary, or family pension that they receive in advance or arrears within a financial year. The total amount of income assessed is higher than it would otherwise be; thus, this relief is given. By including details about your income on Form 10E, you can apply for this relief.
Who can use it?
To request relief under Section 89 of Income Tax Act, 1961, all registered users on the e-Filing portal may submit information about their income in Form 10E.
- Form 10E has seven parts:
- PAN and contact information are personal information
- Salary and family pension obtained in arrears – Annexure 1 (arrears)
- Salary and family pensions collected in advance – Annexure I (Advance)
- Annexes II and IIA (Gratuity) – Payment in nature of Gratuity in respect of past services
- Annexure III (Compensation) – Payment in the form of compensation from the current or former employer at or in association with the termination of work following a continuous service period of not more than 3 years, or if the remaining term of employment likewise has a minimum remaining service period of 3 years
- Annexure IV (Pension) – Payment in commutation of allowance
- When submitting Form 10E, proper annexure must be chosen based on the type of money received
- Personal Information – The basic necessary contact information for this section’s purpose.
- Annexure I (Arrears) – This section’s purpose provides general information about pay, and family pension received in arrears.
- Annexure I (Advance) – This section describes the advance salary or family pension received.
- Annexure II & IIA (Gratuity) – This section provides a general overview of gratuity payments made for previous services.
- Annexure III (Compensation) – This part comprises broad facts of income in nature of compensation from the employer or previous employer at or in connection with the termination of employment after continuous assistance of 3 years or where the unexpired portion of the term of employment is also 3 years.
- Annexure IV (Pension) – This section covers general information about pension payment in commutation.
- Declaration: The declaration provided by the taxpayer is in this section.
Submitting form 10E
Step 1: Enter your user ID and password to access the e-Filing portal.
Step 2: Click e-File > Income tax forms > File Income Tax Forms from your Dashboard.
Step 3: On the page (File Income Tax Forms), select Form 10E. Alternatively, you can file the form by typing Form 10E into the search bar.
Step 4: Choose the assessment year (AY). and press continue.
Step 5: Click ‘Let’s Get Started’ on the Instructions page.
Step 6: Select the required sections to be filled and press ‘Continue’.
Step 7: After documenting all information, click ‘Preview’.
Step 8: After entering all the information, click ‘Preview’ on the previous step’s screen.
Step 9: Go to the E-Verify website.
A success message, Transaction ID, and Acknowledgement Receipt Number appear following a successful e-Verification. Please note the transaction ID and acknowledgement receipt number. An email confirming the successful submission of your form is sent to the email address and mobile number registered with the e-Filing portal.
Receiving a voluntary retirement scheme may be eligible for relief under Section 89 of the income tax act. However, if you have already claimed the exemption under Section 10 (10C) of the Income Tax Act, further benefit cannot be availed.
You are limited to one exemption. The details will be helpful when submitting the 10E form. Consult a chartered accountant or any income tax specialist if you are still unclear. They will assist you in efficiently filing your tax return.