Arrears Salary & It's Taxation

Arrear Salaries Taxation

Arrear salaries means salary received for past period.

Let us understand with an example how one can receive arrear salary-

Mr X salary was 10,000 p.m. In April he received a hike of 5,000 effective from last year's January month. So, as in last quarter he has received a salary of 30,000 for 3 months instead of 45,000. So, a salary of 15,000 becomes an arrear salary.

Relief when salary, etc., is paid in arrears or in advance.

Where an assessee is in receipt of a sum in the nature of salary, being paid in arrears, in any one financial year, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, the Assessing Officer shall, on an application made to him in this behalf, grant such relief as may be prescribed.

Taxpayer must meet certain conditions to claim relief under Section 89. The reliefs can be claimed on any of the following received during a particular year:

a) Salary received in arrears or in advance

b) Premature withdrawal from Provident Fund

c) Gratuity

d) Commuted value of pension

e) Arrears of family pension

f) Compensation on termination of employment

Arrear salaries will be Taxable under the Salaries head of Income. They will be Taxable in the year of receipt. But, there could be a scenario where the rate is higher in the year in which it is received. So, in such cases the taxpayer is eligible to claim relief u/s 89.

Let us see the steps to calculate the relief under this section

Step 1: Calculate tax payable as per the existing tax rate in the current year income including arrears.

Step 2: Calculate tax payable for current year income excluding arrears

Step 3: Calculate the difference in taxes computed in both the above steps. This is the additional tax liability due to arrears.

Step 4: Calculate tax payable on the total income (excluding arrears) of the year to which the arrears relates.

Step 5: Calculate tax payable on the total income (including arrears) of the year to which the arrears relates.

Step 6: Calculate the difference in taxes computed in step 4 and step 5.

This step gives the additional tax amount that should ideally be paid if the arrears were received in same year.

Step 7: When tax amount calculated in step 3 is more than the step 6, then relief equals to the excess amount over Step 6 is given u/s 89.

For eg, Mr X earned 5,00,000 on the current FY 22-23. He have also received 2,50,000 as an arrears salary which relayed to FY 21-22.

His income in 21-22, excluding the arrears were 3,00,000. So, in this case let us calculate the relief using the above step.

Step 1: Tax payable as per the existing tax rate in the current year income including arrears i.e on 7,50,000 will be 65,000

Step 2: Tax payable for current year income excluding arrears i.e. on 5,00,000 will be Nil

Step 3: Calculate the difference in taxes computed in both the above steps. This is the additional tax liability due to arrears. In this case it is 65,000

Step 4: Tax payable on the total income (excluding arrears) of the year to which the arrears relates i.e. on 3,00,000 is Nil

Step 5: Tax payable on the total income (including arrears) of the year to which the arrears relates i.e. on 5,50,000 it will be 23,400

Step 6: Now, the difference in taxes computed in step 4 and step 5 will give us the additional tax amount that should ideally be paid if the arrears were received in same year. In this case it is 23,400

Step 7: Since, the tax amount calculated in step 3 is more than the step 6, therefore, relief equals to the excess amount over Step 6 will be given u/s 89. Here it will be 41,600.

Filing form 10E

The employee who is eligible for the claim needs the file form 10E before filing income tax return. The form 10E needs to be file on the e-filing portal of Income Tax.