Claiming Tax Relief on Salary Arrears

Overview : Your tax situation might change if you receive salary or pension in arrears. Most of us worry and assume that it will move us up in the tax slab or tax rates might increase in the year arrears are received as compared to the year to which they belong. However, the tax laws allow a relief under Section 89(1) in order to protect you from any additional tax burden due to delay in receiving income. If you have received any portion of your salary in arrears, this relief can be directly claimed on your income tax return.

Claiming Tax Relief on Salary Arrear It has been made mandatory by the Income Tax Department to file Form 10E in order to claim relief under Section 89(1). As per Section 89(1), tax relief is provided by recalculating tax for both the years; the year in which arrears are received and the year to which the arrears pertain. Assuming that arrears were received in the year which they were due, your taxes are adjusted. Claiming Tax Relief on Salary Arrears

Let’s understand this calculation in detail. Tax for the year in which arrears are received is calculated both inclusive as well as exclusive of arrears. The difference is the tax on additional salary, let’s call it x. Now tax is computed for every year to which the arrears pertain- including as well as excluding arrears. The difference is arrived at, let’s call it y. If x is more than y, relief is available to the taxpayer. Claiming Tax Relief on Salary Arrears

While claiming relief on arrears following certain points should be kept in mind

Form 10E must be filed online on the Income Tax Department website www.incometaxindiaefiling.gov.in . A notice from the income tax department is issued for non-compliance if a taxpayer claims relief for last financial year but did not file Form 10E. Hence, Form 10E must be submitted before filing your income tax return.

It is confusing for many taxpayers to decide which assessment year to choose while filing Form 10E. Arrears may pertain to earlier years, however, one has to choose the assessment year in which arrears have been received. For example, if arrears are received in financial year FY 2015-16, choose assessment year as AY 2016-17.

While submitting Form 10E online no copy is required to be attached to your tax return. However, all documents must be filed and kept safely in your records.

Before adjusting your taxes and allowing tax relief, your employer may ask for confirmation of submission of Form 10E. However, it is not mandatory to submit this form to the employer. By filing this form at the time of submitting your tax returns you can claim tax relief. Unlike salary which is taxable when it is due or when actually received, whichever is earlier, arrears are announced from the back date and hence, can not be taxed when due.

Those who receive a family pension in arrears are also allowed relief under section 89(1). The calculation is the same as mentioned above.