Section 89 of the Income Tax Act provides relief to taxpayers who receive a portion of their income in arrears or in advance. Such an untimely receipt artificially inflates their income for the current financial year, which pushes them into a higher tax bracket. Section 89(1) of the Income Tax Act provides a way to reduce this extra tax burden.
It allows the taxpayer to claim relief, meaning they can spread out the tax calculation over the years when the money was actually due to be received and not just the current year. This lowers the overall tax payable. Let’s understand Section 89 in detail, learn how it works, and see the role of Form 10E in claiming income tax relief under Section 89.
What is Section 89 of the Income Tax Act?
Under Section 89 of the Income Tax Act, taxpayers can claim relief on salary, compensation in lieu of salary, or family pension received as arrears or in advance during a financial year. This relief is provided to address situations where the total income, including these payments, is taxed at a higher rate than it would have been otherwise. To claim this relief, individuals must submit details of their income using Form 10E.
All registered users on the e-Filing portal who are individuals can avail the benefits of Section 89 by furnishing Form 10E. This includes individuals who have received salary or profit in lieu of salary, or family pension, in advance or arrears during the relevant financial year. Please note that the specific eligibility criteria and documentation requirements may vary depending on individual circumstances and the latest tax regulations. It is advisable to consult with a tax professional or refer to the official Income Tax Department guidelines for detailed information and guidance on claiming relief under Section 89.
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Relief under Section 89
To avail tax relief under Section 89, employees must submit Form 10E electronically through the income tax department's e-filing portal. This form is mandatory for claiming relief on arrears received in the current year but pertaining to previous tax years. Section 89(1) outlines the relief calculation process, involving tax recalculation for both the year of arrears receipt and the relevant previous year. The taxes are then adjusted in the year they were originally due. It's important to note that Form 10E must be filed prior to submitting the Income Tax Return.
When can you claim tax relief under Section 89?
To claim relief under Section 89(1), an employee must meet specific conditions, including:
- Receiving salary in arrears or advance.
- Receiving salary for a period exceeding 12 months in a single financial year.
- Receiving family pension in arrears.
- Receipt of gratuity.
- Compensation received upon termination of employment.
- Receiving commuted pension.
It is important to note that relief can only be claimed if the receipt of such arrears or payments results in a higher tax liability. If no additional tax is payable, the relief will not be granted.
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How does Section 89 work?
Receipt of arrears or advance salary increases your taxable income for that year and leads to an extra tax burden. Section 89 provides relief by allowing you to distribute this income. Instead of taxing all the arrears or advance salary in the year you receive it, you can spread this income over the years it was actually due.
When you receive income that pertains to past years (arrears) or future years (advance), you calculate the tax liability for each relevant year as if you had received that income in those specific years. This involves estimating the tax that would have been payable for each year based on the income received.
Next, you compare the total tax that would have been paid in those years with the tax you're required to pay now due to receiving the arrears or advance income. This difference represents the additional tax burden, and you can claim it as a relief under section 89.
However, to claim this relief, you need to:
- Include the details of this calculation in your income tax return for the year you received the lump sum payment.
- Submit Form 10E online using the Income Tax Department’s portal (explained later) before filing your income tax return.
Why is Section 89(1) important for tax-savings?
Section 89(1) of the Income Tax Act provides a significant tax relief for taxpayers who receive income in arrears or advance. This provision aims to mitigate the potential tax burden arising from the temporal mismatch between the earning period and the receipt of income.
Key importance:
- Reduced tax liability: When income is received in arrears, it can inadvertently push taxpayers into a higher tax bracket. Section 89(1) addresses this by recalculating the tax for both the year of receipt and the year to which the income pertains, preventing excessive tax payments.
- Fairness and equity: This provision ensures that taxpayers are not penalised for the timing of income receipt. It promotes a more equitable tax system by preventing undue tax burdens arising from circumstances beyond the taxpayer's control.
In essence, Section 89(1) serves as a safeguard against excessive tax liabilities caused by the delayed or advanced receipt of income. By recalculating tax on a year-by-year basis, it ensures that taxpayers are taxed fairly and equitably, regardless of the timing of income recognition.
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Conditions for relief under Section 89
To qualify for relief under Section 89, the following conditions must be met:
- Indian residency
- The taxpayer must be a resident of India during the relevant assessment year.
- Retirement benefits account
- The account must be a designated retirement benefits account in a country notified by India.
- Residency status at account opening
- At the time of account opening, the taxpayer must have been:
- A non-resident of India.
- A resident of the notified country.
- At the time of account opening, the taxpayer must have been:
- Foreign taxation
- The income from the retirement account must be taxed by the country where the account is located.
- The taxation should be on a withdrawal basis, not on accrual or earning.
How to calculate tax relief under Section 89 on salary arrears?
To calculate income tax relief under Section 89 for salary arrears, follow these steps:
Year of receipt
- Calculate the tax on your total income using the tax rates applicable in the year of receipt.
- While calculating this total income, include the arrears/ additional salary received.
- You can find the details of arrears in Part B of Form 16.
Exclude additional salary
- Calculate the tax on your total income, excluding the arrears/ additional salary.
- Subtract the arrears from your total income (inclusive of arrears) using the arrear document provided by your employer.
Calculate the difference
To determine the additional tax liability resulting from the arrears, calculate the tax on total income both inclusive and exclusive of these amounts. The difference between the two figures will represent the specific tax burden attributable to the arrears.
Year of arrears
- Calculate the tax on your total income for the year the arrears were originally due
- Do not consider the arrears while calculating total income
- This reflects the tax you would have paid without the arrears.
Include arrears
- Calculate the tax on your total income for the year the arrears were due
- In this step, consider the arrears while calculating your total income
- This shows the tax you would have paid if the arrears were received in the correct year.
Calculate the difference
- Find the difference in tax between including and excluding the arrears in the year they were originally due.
- This difference represents the additional tax liability if the arrears had been received in the correct year
Tax relief calculation
When comparing the additional tax liabilities incurred in the year of receipt and the year the arrears were due, the excess liability in the year of receipt can be claimed as income tax relief under Section 89. However, if the liability is lower in the year of receipt, no such relief is available.
The role of Form 10(E) in tax relief claim under Section 89
To claim tax relief under Section 89, taxpayers must submit a signed Form 10E via the Income Tax Department’s e-filing portal. This form lets you show the tax department that receiving all your arrears at once made you pay more tax. Also, it helps you calculate the tax relief by spreading the additional income over the relevant years. Let’s study its role in detail:
Arrear income declaration
In Form 10E, you need to declare the arrear income received. This declaration ensures the arrears are recognised separately from your regular income, which helps you make accurate tax relief calculations.
Calculation of tax relief
Form 10E computes the tax relief by comparing tax liabilities for the year of receipt and the years to which the arrears pertain. It performs detailed calculations to determine the exact relief amount.
Assessment year details
When submitting Form 10E, it is essential to accurately indicate the assessment years relevant to the income being reported. Please clearly specify both the years in which the arrears were accrued and the year in which they were actually received.
Personal information
To complete and submit Form 10E, you will need to provide certain essential personal information, including your full name, Permanent Account Number (PAN), residential address, and marital status.
Nature of Arrear Income
To ensure the correct processing of your relief claim, please designate the specific type of arrear income you received. This information is essential for categorizing your claim accurately. Indicate whether the arrear income originated from salary, pension, or other sources.
Tax computation in two scenarios
Calculate the tax for the “year of receipt”, including and excluding the arrear income. Repeat this calculation for “each year to which the arrears pertain” to determine the difference in tax liability.
Relief computation
Form 10E calculates the income tax relief under Section 89 by comparing the increased tax burden due to the arrear income with the tax that would have been due if the income was received in the appropriate years. By doing so, it ensures you are not unfairly taxed at a higher rate due to the lump sum payment.
Verification and signatures
Verify the details and calculations in Form 10E before submitting it. The form must be signed to authenticate the information provided.
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Supporting documentation
Attach relevant documents, such as salary slips or employer certificates. These documents verify the arrear payments and the period they cover.
Submission to tax authorities
Form 10E must be submitted online through the Income Tax Department's e-filing portal before filing your income tax return for the relevant year. It is worth mentioning that Form 10E organises the tax relief calculations and submits them to the tax authorities. This submission allows you to spread the tax liability over the correct years and reduce your overall tax burden.
Record keeping
Maintain a copy of the submitted Form 10E and related documents for future reference and in case of any queries from the tax authorities.
How to claim tax relief on salary arrears under Section 89?
Section 89(1) provides tax relief and ensures that you're not unfairly taxed because of timing changes in receiving your income. It is vital to recognise that your employer calculates this relief and includes this information in Part B of Form 16, which you receive at the end of the financial year.
Now, to claim this relief, you need to file Form 10E on the income tax website. This submission is crucial because it officially informs the tax authorities about your claim for relief. Furthermore, you are eligible to claim relief under Section 89(1) if you:
Salary and payment terms
- Salary payment frequency: Receive salary either in arrears (after the completion of the work period) or in advance (before the start of the work period).
- Annual salary payments: Receive salary for more than twelve months within a single fiscal year.
Retirement and termination benefits
- Family pension payments: Receive family pension payments in arrears (after the occurrence of the qualifying event).
- Gratuity: Be eligible for gratuity upon termination of employment.
- Termination compensation: Receive compensation when employment is terminated.
- Commuted pension: Have the option to receive a commuted pension (a lump sum payment instead of periodic payments).
Note: You can claim tax relief under section 89 only if receiving arrears or advance income results in a higher tax liability. If your tax remains the same or lower, you cannot claim relief.
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Five things to remember when claiming relief on arrears
Mandatory online submission of Form 10E
- Original: Form 10E must be filed online. All taxpayers who claimed relief in the last financial year but did not file Form 10E will receive a notice from the Income Tax department for non-compliance, however, your return will not processed until you submit the form.
- Rephrased: Pursuant to tax regulations, Form 10E must be filed electronically. Taxpayers who claimed tax relief in the previous financial year but have not submitted Form 10E will be subject to a non-compliance notice from the Income Tax Department. Please note that the processing of your tax return will be contingent upon the timely submission of Form 10E.
2. Taxability of salary arrears
- Original: Salary is usually taxable when it is due or when it is received, but in case of arrears, they are usually announced from a back date, which is why they cannot be taxed when due.
- Rephrased: While regular salary is typically taxed in the year it is earned or received, arrears, often announced with retroactive effect, are generally taxed in the year of receipt.
3. Filing Form 10E and determining the assessment year
- Original: Submit Form 10E before filing your ITR. When it comes to choosing the assessment year for arrears, you must choose the assessment year in which arrears have been received. Example, if arrears were received in FY 2017-18, the assessment year shall be AY 2018-19.
- Rephrased: Prior to filing your Income Tax Return (ITR), it is imperative to submit Form 10E. The assessment year for salary arrears should correspond to the financial year in which the arrears were actually received. For instance, if arrears were received in Financial Year 2017-18, the relevant assessment year would be 2018-19.
4. Retention of Form 10E
- Original: A copy of Form 10E is not required to be attached with your tax return. However, you must file and keep all documents in your records.
- Rephrased: While a physical copy of Form 10E is not mandated for inclusion with your tax return, it is essential to file the form electronically and retain a copy for your records.
5. Employer inquiry regarding Form 10E
- Original: Your employer may ask for a confirmation of submission of Form 10E, however, it is not necessary to submit this form to the employer.
- Rephrased: Your employer may inquire about the submission of Form 10E. However, providing a physical copy of the form to your employer is not obligatory.
Income tax notice for non-filing of Form 10E
An income tax notice for non-filing of Form 10E is issued when a taxpayer claims relief under Section 89(1) of the Income Tax Act but fails to submit the required form.
Form 10E is essential for claiming tax relief on arrears or advance salary, particularly when income is received in a year other than when it was due. This form ensures that taxpayers are granted appropriate relief for such irregular income.
If the tax authorities detect that Form 10E has not been filed despite claiming Section 89(1) relief in the income tax return, they issue a notice highlighting the non-compliance. The notice serves as a reminder to file the form and provide the necessary details to validate the claim.
The notice typically outlines the reasons for the non-filing and provides a deadline for compliance. It may also include instructions on how to submit Form 10E and any supporting documents required. Promptly responding to such notices is crucial to avoid the disallowance of the claimed relief. Ignoring the notice may result in the rejection of the relief and a reassessment of the filed return.
Conclusion
Section 89 of the Income Tax Act provides relief to taxpayers who receive income in arrears or advance. When you receive past salary (arrears) in the current financial year, it usually pushes you into a higher tax bracket which results in higher taxes. This section helps avoid this by allowing you to spread the income over the years it was actually earned.
To claim this income tax relief under Section 89, you have to calculate and compare the additional tax liabilities from the year of receipt and the year in which arrears were due. If the tax liability in the year of receipt is higher, the excess is allowed as tax relief. Furthermore, taxpayers must submit Form 10E online before filing their income tax returns. This form organises tax relief calculations and submits them to the tax authorities.
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