Calculate Tax on Arrears in 7 Easy Steps

This year might have been happy one for you if you received long pending salary dues as arrears. But we know receiving arrears makes everyone happy but pain of paying higher taxes makes them worried? We explain how to calculate tax on arrears and claim tax benefit u/s 89(1) in income tax return with example.

Tax Calculation on Arrears:

We take a simple example. Amit is a government employee and he has received his long awaited salary dues as arrears. Here are the numbers.

  • Salary income for FY 2015-16: Rs 9,00,000
  • Additional Arrears received: Rs 5,00,000
  • Total income: 14,00,000

This arrears was due from last 3 financial years as follows:

  1. FY 2014-15: Rs 2,00,000
  2. FY 2013-14: Rs 1,75,000
  3. FY 2012-13: Rs 1,25,000

We use this example to illustrate tax calculation on arrears. For simplicity we would assume that Amit has not invested for any tax exemption, so his income stated above is “Net Taxable Income”.

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Step 1:

Calculate tax for present year without considering arrears

So for FY 2015-16, the taxable income without arrears = Rs 9,00,000

Income Tax Payable = Rs 1,08,150

Step 2:

Calculate tax for present year after adding arrears payout

So for FY 2015-16, the taxable income without arrears = Rs 9,00,000 + Rs 4,00,000 = Rs 14,00,000

Income Tax Payable = Rs 2,52,350

Step 3:

Subtract income tax payable you get in step 2 from step 1

Additional tax due to arrears: Rs 2,52,350 – 1,08,150 = Rs 1,44,200

Also Read:  Best Tax Saving Investments u/s 80C

Step 4:

Allocate the arrears components to the respective financial years. So in our case it’s as follows

FY 2014-15: Rs 2,00,000

FY 2013-14: Rs 1,75,000

FY 2012-13: Rs 1,25,000

Step 5:

Calculate new tax payable for each financial year where the component of arrears is present i.e. adding arrears to the old income in respective financial years.

Calculating Tax on Arrears

Calculating Tax on Arrears

Add the excess tax payable across the financial years due to arrears. In our case it comes out to be Rs 1,03,000. This means that had the salary payout been on time you would have paid this amount as tax.

Step 6:

Subtract the excess tax payable due to arrears in Step 3 from the additional tax payable in Step 5.

Tax Difference: Rs 1,44,200 – Rs 1,03,000 = Rs 41,200.

If you consider arrears payment as income for only present financial year, you would be paying Rs 41,200 extra as taxes, without any fault of yours. Government thankfully understands the situation and has provided relief for tax payers under Section 89(1).

Also Read: Submit Income Tax Proof to Employer – How, When and Why?

Step 7:

Calculate your final tax liability for FY 2015-16

So for FY 2015-16, the taxable income with arrears = Rs 9,00,000 + Rs 4,00,000 = Rs 14,00,000

Income Tax Payable = Rs 2,52,350

Tax Deduction u/s 89(1) on account of arrears = Rs 41,200

Net Tax payable = Rs 2,52,350 – 41,200 = Rs 211,150

To claim the above tax benefit u/s 89(1), you need to fill up Form 10E. From FY 2014-15 (assessment year 2015-16), the income tax department has made it mandatory to file Form 10E if you want to claim relief under section 89(1). The form can be filled online on the Income Tax Website.

The question is what would have happened if there was no excess or lower tax as in Step 6?

There would be no special treatment. You just calculate your tax after adding arrears and pay our taxes. Section 89(1) would not be applicable!

Also Read:13 Investments to Generate Regular Income

Calculate Tax on Arrears

Calculate Tax on Arrears

Form 10E: How to fill?

The Form 10E can be filled online from Income Tax website. Here are the steps:

  1. Login to Income Tax efiling website.
  2. After you have logged in, click on tab named ‘e-File’ and select ‘Prepare & Submit Online Form (Other than ITR)
  3. On the next screen, select Form 10E and the Assessment Year from the drop down.
  4. The Form 10E would be displayed with instructions and annexure. Fill the relevant details and submit.

In case you do not submit Form 10E to take advantage of Sec 89(1), you might receive notice from income tax department saying: The relief u/s 89 has not been allowed in your case, as the online form 10E has not been filed by you. The furnishing of Online form 10E is required as per sec.89 of the Income Tax Act

Tax Calculators:

You can download the income tax calculator for past financial years here. Use them to calculate your taxes for the respective years.

58 thoughts on “Calculate Tax on Arrears in 7 Easy Steps

  1. sandeep kumar( ca article assiatant) says:

    Dear sir,

    I received salary advance in f.y 2017-18 for two successive year so which slab rate shall i use for calculate tax for A.Y 2018-19.

  2. Hi Amit, thanks for your elaborate explanation on form 10e under us 189.
    My doubt is – I have been using ITR 1 form for all these years. There was no need of using ITR 2. I have received my pension arrears for the last 8 years in Nov 2017. I am filling Form 10 e on incometaxefiling website. For filing the return for Ay 2018-19 which ITR form 1 or 2 (because Iam claiming the relief us 189) to use. I do not have income from 2nd house property. If I use form 2 instead of form 1, is it acceptable for the refund under us 189. Kindly clarify this and help me. Thanking you in advance. Kittur

  3. Dear Amit, I did not have to pay tax in financial year 2016-2017 but i am now falling in the 5% tax bracket with the arrears. Can i claim relief u/sec. 89 (1) in respect of arrears received in financial year 2017-2018 but which pertain to financial year 2016-2017 and spread it over both these financial years. Kindly advise.

  4. My total taxable income for financial year 2017-2018 is rs. 368000 including arrears. The arrears received in respect of financial year 2016-2017 amount to rs. 34736. For the financial year 2016-2017 i did not have to pay tax. Can i avail of the relief u/sec. 89 (1) and can i spread the arrears over these two financial years.

  5. Dr. M V Seshaiah says:

    Sir, I am a Lecturer , i received Rs 8 lakhs arrears for the period of 2010 Nov to 30 June 2018 as a part of salary fixation . Please enlighten me with illustrations to split my Income Tax during this span .

  6. 10e ke annexue 1 KE FIRST COLUMN ME AY DALA JATA HAI YA FY

  7. Dear Amit, it appears to me that there can be some relief u/s 89 [1] if and only if the taxpayer moved from a lower tax bracket to a higher bracket during the arrears period, or, if the tax slabs were increased during that period [which actually means the same thing]. E.g. if he were always in the 20% bracket throughout that period, it does not make any difference whether he spreads the arrears over those years, or pays the tax in the year of receipt. Am I right, or am I missing something?

    • You are totally right. The idea was increased income may put people in higher than usual tax slab and penalize without any fault of theirs. Hence the concept of arrears tax benefit.

  8. DR S M ZAFARULLAH says:

    Relief U/s 89
    Claimed the above in FY 2016-17 for Arrears of Salary received spreading from 2009-2015.
    Now in 2017-18 Arrears of HRA received spreading from 2009-2015 (same period)
    How do I calculate Relief U/s 89 ?

  9. Sir,
    I benefited from standard deduction of Rs .5000 & 2000 in the previous financial years, for my income was below the prescribed ceiling. Now I received arrears for the previous years which will offset this benefit(standard deduction).so while filing form 10E for tax relief under section 89(1) whether I have to refund the said standard deduction received.

    • Standard deduction was not applicable in past few financial years! I think there is some error in understanding – could you please clarify

      • Sir,
        sorry. It was standard rebate under section 87-A or so. Kindly replace standard deduction with the word rebate in my query.

  10. I am government employee. I have received arrears for FY 2016-17 in FY 2017-18.
    My problem is my arrears deduction count FY 2017-18. my 2017-18 deduction are 122000 kya me arrear ke sath hue deduction ko 2017-18 me count kar sakta hu

  11. P Ashok Kumar says:

    Dear Amit,

    In FY 2017-18 teachers in Telangana State received arrears pertains to FY 2014-15.
    But most of the teachers not filed their returns for FY 2014-15 / FY 2015-16 / FY 2016-17.
    Now they wants to claim relief u/s 89(1).
    Is it Mandatory to file Income Tax Returns for the previous years to claim relief u/s 89(1) and for submission 10E.

    Thanks in advance.

  12. Hello Sir,

    Thanks for explaining Relief U/s 89 with example.
    My query is – while calculating the relief, if the previous year Total Income has Arrears included for those year tax submission, for current year calculation, should the GTI be inclusive of arrears or excluding.! Hope my question is understood.

    Thanks in advance for your help

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