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:
- FY 2014-15: Rs 2,00,000
- FY 2013-14: Rs 1,75,000
- 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.
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!
Form 10E: How to fill?
The Form 10E can be filled online from Income Tax website. Here are the steps:
- Login to Income Tax efiling website.
- After you have logged in, click on tab named ‘e-File’ and select ‘Prepare & Submit Online Form (Other than ITR)
- On the next screen, select Form 10E and the Assessment Year from the drop down.
- 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.
HI AMIT,
I WANT TO ASK THAT
1-
WHILE FILLING’ TABLE A’ IN 10E CALCULATION WHETHER WE HAVE TO FILL TOTAL INCOME OF PREVIOUS YEAR OR NET TAXABLE INCOME?
2-
I HAVEN’T RECEIVED FOUR MONTHS SALARY LAST YEAR (FY 16-17), BUT HAVE FILED ITR WITH INCLUDING THAT AMOUNT ALSO.
NOW THIS YEAR I HAVE RECEIVED THAT FOUR MONTHS SALARY AS ARREAR ALONGWITH SOME OTHER ARREAR PART OF PREVIOUS TWO YEARS.
SO PLZ TELL ME HOW TO FILL TABLE A.
SHOULD I DEDUCT 4 MONTHS SALARY AMOUNT FROM INCOME OF PREVIOUS YEAR WHILE FILLING VALUE IN TABLE A?
Very good information about tax calculations in case of arrears received.
Thanks a lot
Dear Sir, Thank you for the nice article. I have received the salary (full salary) of the years 2015-16 and 2016-17 as arrears in the current financial year (2017-18). I have a doubt regarding the contributions to CPS (contributory pension scheme). The government has deducted CPS from the arrears before paying the arrears. Can I claim the amount of CPS as deduction when I calculate the tax for the respective years. My Auditor says it cannot be deducted because the CPS account is created only in the current financial year.
your auditor is right!
Hi…
I have received arrear in F.Y. 2017-18( A.Y.2018-19) BUT THE ARREAR BELONG TO F.Y.2016-17 ( A.Y.2017-18). WHEN TO SUBMIT 10E FORM TO GET TAX REKIEF UNDER 89(1).
Hi…
I am government employee. I have received arrears for FY 2016-17 in FY 2017-18.
My problem is that, in FY 2016-17 was not coming under any Tax slab due total taxable income below 2.5laks. but due to arrears of FY 2016-17 I am coming under tax slab of 5% in FY 2017-18.
Hence, can I get the debate u/s 89(1)? and can I demand for refund for the tax deducted by employer in FY 2017-18 due increase in total taxable income due arrears of FY 2016-17?
Thanks.
You can claim rebate u/s 89(1). But last year tax slab was 10% so just choose if you want to claim it as arrears or present year income. As for claiming refund from your employer, I think it might not be possible especially when its from government.
I recieved arrears this year FY17-18, which are related to previous year FY16-17. Can i claim the deductions under 80C(max of 1.5Lalhs) for FY16-17? I showed a deduction of 1.1Lakh under 80C last year FY16-17, net taxable income was Rs.3,57,500. And now since i add the arrears to it, can i increase the deduction to 1.5L and mention the net taxable income for last year as Rs3,17,500 in form 10E?
No you cannot make tax saving investment for previous financial year!
We are recived 7cpc arrears after income tax calculation
All in come tax amount sent to income tax dept
How we calculate arrears tax for this year 2017-2018 please
hi sir,
I received the arrear in f.y.2017-18 for previous 4 yrs. my concern is what i should file 10 for 4 yrs or i should file 10 e in the f.y.201-18
plz respond me quickly
In the year you receive arrears
I RECEIVED PAY ARREARS FOR LAST FIVE YEARS. FOR FIRST YEAR IT WAS A NEGATIVE FIGURE AND POSITIVE FOR NEXT FOUR YEARS. HOW TO SHOW NEGATIVE PAY ARREARS FOR FIRST YEAR FOR CALCULATING RELIEF U/S 89.
I am not sure what negative arrears mean! You can ignore that
Mera ek or question he. Meri mother ki bank me kuch FD he, unhone bank me PAN details di thi but staff ne update nahi kia to unka 20% ke hisab se TDS deduct ho gaya. Form 26AS me TDS show nahi karega . Par me bank me ja kar TDS certificate or Interese certificate le aaya hu. Kya ham refund clami kar sakte he. Please help us.
Thanks in Advance.
Yes get PAN updated and file income tax return to get tax refund. Also if TDS is deducted it should reflect in Form 26AS (if its for last financial year). For this financial year TDS might take time to reflect in Form 126AS.
Bank manager denied updating TDS with PAN. He has issued a TDS certificate only. Please guide me in this situation.
I got it. This is because PAN number was not provided and hence 20% TDS would have been deducted. While deducting TDS, PAN was not present hence it might not have reflected in Form 26AS. So you can use the TDS certificate to file tax return.
Yes how to use TDS certificate in return filing, if it not reflecting in 26as.
Hello sir,
My situation is complex. I am a government employee and my 4-month salary of FY 15-16 was stuck due to departmental reason. I got that salary in FY 16-17 and due to this addition, I paid higher tax in 20% bracket. My CA has filled ITR and Form 10E but I am not satisfied with return filled by him. Actually, he subtracts arriers from total income but at the end, he also deducts ppf amount of that 4 months from the total taxable salary of 16-17. Hope you understand, please help me out.
What I understand is you want to show your EPF contribution from arrears in one financial year while taking advantage of arrears on salary. This is a grey area for taxation. Logically your CA seems right because if the salary is treated as arrears so would be any deduction from the same. However you can take full contribution of PF from arrears and show in one present financial year too. Check out more @ the Hindu
I recieved arrears of yrs 11-12, 12-13, 13-14 & 14-15 during the yr 15-16
I completed form 10E for rebate u/s 89
A refund of rs 50 was due as on 31-3-2016 wrt Income Tax according to my calculations
I somehow forgot to file ITR for 15-16 in time
I efiled it around 20-6-2017.
Now recieved a intimation regarding IT demand of Rs 1.45 Lakh u/s 143 which their calculation shows it to be Interest u/s 234
Is section 234 (1,2,3) all three applicable to me?
Kindly help
Seems complicated to me — think you should consult a tax consultant/CA
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.