Received arrears of salary??? Get relief in tax liability section 89

Section 89 of the Indian Income Tax provides rebate to salaried individuals for receiving any portion of their salary in arrears or in advance or profit in lieu of salary (“additional salary”). When arrears of salary pertaining to any earlier years are paid in subsequent period then the taxpayer moves to a higher marginal tax. This section provides for tax relief of extra tax burden due to higher tax rate margin. When does the provision become applicable?

  • Where salary is received in arrear or in advance or any portion of family pension is received by an assessee in arrears.
  • Where any compensation for termination of employment is received after continuous employment for three years or more provided the employee has remaining at least three year of service.
  • Where any gratuity is received in respect of past service of five years or more
  • Where any payment in commutation of pension is received.

Amount to be claimed as relief The tax payable by the assessee on his total income of the previous year in which the salary is received in arrears or in advance, shall be reduced by the amount by which the tax on total income excluding such additional salary for the relevant previous year exceeds the tax on total salary including additional salary of that previous year for which the additional salary is being received. Let’s have a look on this example for better understanding of this provision- a salaried employee whose salary income for the financial year (FY) 2009-10 is Rs.567000.00, has received arrears of salary Rs. 20000.00 for the FY 1992-93. He has received salary for the FY 1992-93 amounting to Rs. 38000.00. What will be the amount of relief that X can claim u/s 89 of the Act? Below are the steps for computing relief u/s 89 which X can claim at the time of filing of his return of income for the FY 2009-10. i.e.  Compute tax on total income on receipt basis for both the Financial Year. ii.Compute tax on total income on accrual basis for both the FY. iii.Find out the difference between (i) and (ii), which is the amount of relief that can be claimed u/s 89.

ParticularsTaxable income as per “receipt” basisTaxable income as per “accrual” basis 
 
 2009-101992-932009-101992-93
 (a)(b)(c)(d)
Salary Income567000.0038000.00567000.0038000.00
Arrears of Salary20000.00NilNil20000.00
Gross salary587000.0038000.00567000.0058000.00
Total  Tax liability  on above79413.001700.0073233.006500.00

(i) Total Tax on Receipt Basis (a+b)Rs. 81113.00 (ii) Total Tax on Accrual Basis (c+d)Rs. 79733.00 So, you can claim relief u/s 89 for AY 2010-11 of Rs. 1380.00 e.i. (i & ii). However, no such relief shall be allowed in respect of any amount received by an assessee on his voluntary retirement or termination of his service. Timely and efficient tax planning go long way in lowering your total taxes by employing and taking advantages of in-built provisions of tax exemptions, deductions, concessions, rebates, reliefs, allowances and other benefits granted by the tax laws so that the incidence of tax is reduced. We at Taxmantra.com have the expertise to guide you in lowering your tax outgo and thus enhancing your total take away.  We at Taxmantra.com provide full year support solving all your tax issues, in addition to filing of your return of income with excellent tax planning. Please join us now in pursuit of simplifying individual taxation! Alok Patnia Founder and Director at Taxmantra.com

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