August 02 , 2013
Unexpected arrears bring celebration or when they are long overdue they give relief. If arrears raise your tax liability some of the joy is erased. Truly, it would be unfair of the tax department if they charge you additional tax on income; in case tax would be lower had you got the income in the relevant years. But thankfully, I-T laws are just; in such a situation you can claim relief on salary arrears tax under section 89.
What section 89 of Income Tax Act provides for
This income tax relief applies in case of salary, family pension or gratuity paid in arrears or in advance when your tax liability is increased than what it would have been if arrears or advance were paid in the years to which they belong.
Automatically, this means if your tax amount is lesser than what it would have been if you received it in the relevant years, there are no benefits to be had.
Calculating arrears tax relief u/s 89
Plain calculations are required to arrive at the relief amount you stand to get. We've put them in easy steps below assuming you get arrears in 2013-14 applicable to the years 2011-12 and 2012-13:
1. Calculate tax on total income of 2013-14 after including arrears and tax on total income of 2013-14 excluding arrears.
2. Subtract both these tax amounts. The difference is the tax on arrears in 2013-14.
3. Now calculate tax on total income of the previous two years, including arrears belong to those years, separately and add them. Also calculate tax on total income of the previous two years separately after excluding arrears and add them.
4. On subtracting these two taxes what you are left with is the tax you would have paid on arrears in those 2 years put together.
5. Finally subtract the taxes in 2 and 4. The difference is the tax relief you can claim in assessment year 2014-15 on salary arrears.
How you can get relief on salary arrears or advance
You can get the tax relief adjusted on salary TDS by submitting income proofs of the relevant years to company HR in the year arrears are paid. Fill up Form 10E for providing details of salary of the financial years concerned.
In case you missed doing this you can adjust it in the ITR form by filling calculated tax relief amount in the cell provided for Relief under Section 89 in Tax Computation section. ITR forms are annexure-less so you need not attach Form 10E but maintain it with income proof of relevant previous years for record's sake.