How to calculate income tax after relief under Section 89?

Salary arrears are treated as salary income in the income tax return. They are taxable in the year of receipt of this income. Hence, if past dues are added to your salary for the current year, your tax liability will increase. This is where Section 89(1) comes into the picture.

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See also: All about TDS on salary

What is Section 89(1)?

Section 89(1) is a relief allowed to taxpayers in India in case the increase in their salary in the current year is due to the payment of past dues. However, this relief is not akin to a rebate.

See also about: What is Income Tax Form 10E?

Eligibility for relief under Section 89(1)

You are eligible to apply for relief under this section on:

Salary received in arrear or in advance
Receipt of gratuity for past service
Commuted pension
Compensation for job termination

The dues can include payments made as salary, gratuity, premature PF withdrawal, family pension and compensation for employment termination.

How to calculate income tax after factoring in relief under Section 89(1)?

A taxpayer can claim relief for an amount equal to the extra tax liability, arising due to deferment in receipt of income. If you received arrears for the preceding year, you can claim relief using Form 10E. This form can be filed online on the IT portal. Note that those who have not filed Form 10E could receive a notice from the IT department for non-compliance. Their return will not be processed till the form is submitted.

Your employer calculates relief under Section 89(1) and mentions it in Part B of Form 16.

Steps to calculate relief

Calculate the tax liability on total income, both including and excluding the arrears for the year of receipt.

Find out the difference between the two amounts.
Calculate the tax liability on the total income, excluding and including the arrears for the year of accrual.

Find out the difference between the two amounts.
Deduct the amount in Step 4 from the amount in Step 2.

FAQs

Who should file income tax in Form 10E?

It is mandatory to file Form 10E to claim tax relief.

Is relief under Section 89 available in case of VRS compensation?

Yes, relief under Section 89 is available if the employee has not claimed the tax exemption available under section 10 (10C).

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Sunita Mishra

An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.

In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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