Section 89 of the Income Tax Act

Section 89 of the Income Tax Act is a provision that helps individuals who receive arrears or advance salary in a particular financial year. This section addresses situations where you receive a salary in a lump sum for multiple years, which prevents you from being taxed at higher rates in the year of actual receipt.

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What is Section 89 of the Income Tax Act?

Imagine you getting a big chunk of income all at once. It may push you into a higher tax bracket.

Section 89 of the Income Tax Act, 1961 is a special rule that lets you adjust your tax burden in the following circumstances:

  • Salary received belatedly or in advance

  • Backlog of family pension

  • Provident Fund (PF) account premature withdrawals

  • Gratuity

  • Commuted value of pension

  • Terminated employment compensation

This provision aims to ensure that you are not unduly burdened by the lump sum payment of arrears or advance salary in a particular financial year.

How Does Section 89 Work?

When you receive arrears or advance salary, the tax liability on such income can be computed in the year in which it is received or by distributing it over the years to which it relates. Section 89 allows for the latter method, known as the "relief under Section 89." 

This helps calculate the tax on the total income, including arrears as if it were received in the year to which it actually belongs.

IMPORTANT NOTE:

  • Claiming relief involves including details in the income tax return for the year when the lump sum payment occurs.

  • Employees must submit Form No. 10E before filing their Income-tax return to avail of this relief.

Conditions for Relief under Section 89

To claim relief, an individual must:

  • Be a resident of India in the claimed relief year.

  • Have a specified retirement benefits account in a notified country.

  • Have been a non-resident in India and a resident of the notified country when opening the account.

  • Have income taxed by the country of withdrawal, not on an accrual basis.

How to Calculate Tax Relief under Section 89 on Salary Arrears?

You can follow the steps mentioned below to calculate the tax relief on salary arrears under Section 89 of the Income Tax Act, 1961:

Step 1- Year of Receipt: Calculate tax on total income, including additional salary, for the year of receipt. The details of the arrears are in Part B of Form 16.

Step 2- Exclude Additional Salary: Calculate tax on total income, excluding additional salary. Subtract arrears from total salary (including arrears) using the arrear document from your employer.

Step 3- Calculate Difference: Find the difference between Step 1 and Step 2 for additional tax liability due to arrears.

Step 4- Year of Arrears: Calculate tax on total income for the year of arrears, excluding arrears.

Step 5- Include Arrears: Calculate tax on total income for the year of arrears, including arrears.

Step 6- Calculate Difference: Find the difference between Step 4 and Step 5 for the actual tax liability in the past year with arrears.

Step 7- Tax Relief Calculation: The excess of Step 3 over Step 6 is the tax relief allowed. If Step 6 is higher than Step 3, no relief is granted.

Filing Form 10E

Form 10E enables you to claim relief on income received in arrears or in advance, like salary arrears, gratuity, premature PF withdrawal, etc. 

You can easily submit Form 10E digitally through the e-portal of the Income Tax Department.

Access the form in the Income Tax Forms section on the portal for a quick and hassle-free process.

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Key Features of Form 10E:

  • Detailed Income: The Form 10E primarily focuses on providing details of your total income for the financial year, including the income received in arrears.

  • Justification of Claims: It requires specifying the nature and reason for receiving income in arrears or advance.

  • Calculation Assistance:  Form 10E helps calculate the tax relief amount based on the chosen annexure and income details.

  • Verification and Submission: It allows online verification and submission of the form after filling in all sections.

Structure of Form 10E:

The Form 10E is divided into different sections and annexures based on the type of income for relief:

  • Annexure I: Salary arrears or advance

  • Annexure II: Gratuity (past service 5-15 years)

  • Annexure IIA: Gratuity (past service 15+ years)

  • Annexure III: Compensation on termination of employment

  • Annexure IV: Commutation of pension

How to File Form 10E?

Follow the steps mentioned below to file your claims through Form 10E:

Step 1: Log in to the official website of the Income Tax Department using your User ID and password.

Step 2: Navigate to the e-File section and go to Income tax forms. Click on the File Income Tax Forms tab.

Step 3: Choose the 'Persons not having any business/professional income' tab and select Form-10E.

Step 4: Select the assessment year and click 'Continue.'

Step 5: Click 'Let's Get Started' to begin filling out the form.

Step 6: Choose the relevant income particulars and click 'Continue.'

Step 7: Provide details for each section by clicking on the links on the next screen.

Step 8: After completing Form-10E, click 'Preview.'

Step 9: Proceed to e-verify on the preview page.

Step 10: Upon successful submission, receive a message with the transaction ID and acknowledgement receipt number.

Income Tax Notice on Non-Filing of Form 10E

It is mandatory to file Form 10E to claim relief under section 89(1) according to the Income Tax Department since the Financial Year 2014-15 (Assessment Year 2015-16). Failing to do so will result in your claim being rejected. 

The Income Tax Department requires taxpayers to complete Form 10E before claiming benefits under Section 89(1). 

If you skip this step and still claim relief when filing your return, the relief will be disallowed. The Income Tax Department will send you a notice about this issue, even though your tax return will be filed. 

REMEMBER: Submit Form 10E before filing your income tax return.

5 Key Points to Remember When Claiming Relief on Arrears

You should keep the following points in mind while claiming relief on arrears:

  1. Form 10E Filing:

    • It is mandatory to online file Form 10E for all taxpayers claiming relief.

    • Non-compliance notice is issued if Form 10E is not filed.

    • The return processing is put on hold till you submit form 10E.

  2. Taxation of Arrears:

    • Your regular salary is taxed when it is due or received.

    • The arrears are taxed from a back date and not when they are due.

  3. Arrears Assessment Year:

    • You need to file Form 10E before you submit your ITR.

    • Choose the assessment year based on the receipt of arrears.

      • Example: Arrears in FY 2017-18 → AY 2018-19.

  4. Form 10E Documentation:

    • You do not need to attach Form 10E with your Income Tax Return.

    • You need to file and retain all the documents in your records.

  5. Employer Confirmation:

    • Your employer may request the confirmation of Form 10E.

    • The submission to the employer is optional.

Summing It Up

Section 89 of the Income Tax Act, 1961 is a crucial provision that addresses the taxation of arrears or advance salary payments. This section provides a mechanism for the calculation and adjustment of tax liability in cases of varying income receipts in different years. By facilitating the spread of tax liability and preventing undue financial burden on taxpayers, Section 89 significantly promotes fairness and equity in the taxation system.

FAQ's

  • What is relief under Section 89 with example?

    Section 89 of the Income Tax Act in India offers relief from paying higher taxes on income received in arrears or advance. This means if you receive income that should have been paid in a previous year (arrears) or that is meant for a future year (advance), you can claim relief to avoid being pushed into a higher tax bracket due to the bunched-up income in the current year.

    For Example: 

    • Aisha earned a salary of Rs. 40,000 per month in 2022, but due to delays, she received the entire year's salary (Rs. 4,80,000) in 2023.

    • In 2023, her total income became Rs. 4,80,000, pushing her into a higher tax bracket compared to 2022.

    • Using Section 89 relief, Aisha can recalculate her tax for 2023 as if she received the salary monthly in 2022. This would result in a lower tax liability.

  • What is Form 10E in Income Tax?

    Form 10E in Income Tax is used to claim relief under Section 89(1) of the Income Tax Act, 1961. This section provides relief for income received in arrears or advance, specifically:
    • Salary or Profit in Lieu of Salary: This could be arrears of salary you received in a particular financial year, even if it pertains to previous years.

    • Family Pension: If you received a family pension in advance or arrears.

  • What is Section 89(1) read with rule 21A of the Income Tax rules?

    Section 89(1) of the Income Tax Act, read with Rule 21A of the Income Tax Rules, provides relief from paying higher taxes on income received in arrears or in advance. Rule 21A further clarifies the types of income eligible for this relief and prescribes the method for calculating the relief amount.
  • What is the format for relief under Section 89?

    The format for relief under Section 89 of the Income Tax Act, 1961, depends on the specific type of income for which you are claiming relief:
    • For Salary Arrears or Advance:

      • You do not need a specific format to claim relief.

      • Your employer should automatically calculate the relief and reflect it in Part B of Form 16.

      • If they have not, you can calculate the relief yourself using the prescribed formula and claim it by filing Form 10E before filing your Income Tax Return.

    • For other income like Gratuity, Commuted Pension, etc.:

      • You need to claim relief by filing Form 10E before filing your Income Tax Return.

      • The form has specific sections for calculating and claiming relief for different types of income covered under Section 89.

      • You will need to provide details like the amount of income received, the year it pertains to, and your total income for both the year of receipt and the year for which the income is related.

  • What is Form 10E for Relief U/ S 89?

    Form 10E is used to claim tax relief under Section 89 of the Income Tax Act, 1961, for specific types of income received in arrears or advance. These include:
    • Salary arrears.

    • Gratuity

    • Compensation on termination of employment

    • Payment of commutation of pension

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