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.
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.
This arrears was due from last 3 financial years as follows:
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.
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!
The Form 10E can be filled online from Income Tax website. Here are the steps:
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
You can download the income tax calculator for past financial years here. Use them to calculate your taxes for the respective years.
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View Comments
Hello Sir I received Arrear IN F.Y2016-17 (A.Y.2017-18) but the Arrear belong to F.Y.2015-16 (A.Y.2016-17) . Now if I fill form 10E online BUT ITR OF F.Y.2015-16 (A.Y.2016-17) NOT FILLED BEFORE.CAN ITS MANDOTORY TO FILL ITR OF F.Y.2015-16 (A.Y.2016-17) FOR ME TO GET TAX RELIEF UNDER 89(1)
It's not mandatory but its always a good thing to do as it keeps everything clean from tax perspective. You still have time to file your last year return. I would recommend to do so and avoid any uncomfortable questions at later stage.
But even without filing you can take advantage of arrears u/s 89(1)
i got job in jan-16 and salary of jan16 to march 16 get as Arrear IN F.Y2016-17 (A.Y.2017-18).i have no other income in F.Y.2015-16 (A.Y.2016-17).so what income show in itr of F.Y.2015-16 (A.Y.2016-17)
You joined in January and the salary of all 3 months were credited in next financial year. In case of salary income the tax is to be paid as due and not as received. Arrears generally refers to payment of increased salary only.
So for you file income tax return of AY 2016-17 taking 3 month salary as income and AY 2017-18 taking full year salary. This would be tax efficient for you and you need not worry about arrears! I guess even your Form 16 should reflect the same.
Hello Sir I received Arrear F.Y2016-17 (A.Y.2017-18) but the Arrear belong to F.Y.2015-16 (A.Y.2016-17) . Now if I fill form 10E online . which A.Y. is calculated(2016-17 or 2017-18)
It would be AY 2017-18 as the money was received for this assessment year
Hi Amit,
While filling Form-10E online, under tab Annexure-1 there is a 'Table A'.
I am confused what to fill in first column "Previous Year (s)" ?
Previous year means financial year for income tax
I have received arrears this year which pertains to previous 3 years. However this year & as well as previous three years. I have been in the 30% tax bracket.
So, It does not really matter weather I pay the tax on arrears this year or allocate it to previous years as there will be no savings in my case.
Pls. confirm my prsumption
Agree if the tax slab was same for previous years too, there is no benefit in making tax calculation complex for arrears.
Nicely explained. Thanks. I have the following questions in this context.
1. Does the DDO have to upload any Relief figures for the employees u/s 89(1) with the Income Tax Dept ?
2. Does the DDO mention the relief amount u/s 89(1) in Part B of Form 16?
3. Which is to be submitted first on Income Tax efiling website, Form 10E or the ITR?
I am NOT sue about the DDO part. As for which form to submit first. You can do either as it would link itself.