Last year the Government has implemented the Sixth Central Pay Commission and in regard to which most of the salaried individuals have received heavy salary. But now they are worried whether they can save taxes on such arrears of salary or not. Section 89(1) of the Income Tax Act, 1961 (the Act) provides that if an individual receives any portion of his salary in arrears or in advance, or receives profit in lieu of salary he can claim relief in respect of such salary received. The relief on salary received in arrears or in advance (hereinafter to be referred as “the additional salary”) is computed in the manner laid down in rule 21A(2) as under:

1. Calculate tax payable on total income, including the additional salary of the relevant previous year in which the same is received.
2. Calculate tax payable on total income, excluding the additional salary of the relevant previous year in which the same is received.
3. Find out the difference between the tax at (1) and (2)
4. Compute the tax on total income after excluding the additional salary in the previous year to which such salary relates.
5. Compute the tax on total income after including the additional salary in the previous year to which such salary relates.
6. Find out the difference between the tax at (4) and (5)
7. The excess of tax computed at (3) over the tax computed at (6) is the amount of relief admissible under section 89(1). No relief is, however, admissible if the tax computed at (3) is less than the tax computed at (6). In such a case the assessee-employee need not apply for relief.

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