In view of the optional tax regime introduced from the financial year 2020-21, many salaried individuals are expected to have a tryst with these tax provisions.
As per Income tax law, the income from salary is taxed on the basis of due or receipt whichever is earlier. This means, if your salary was due in the financial year 2019-20 but is received in the financial year 2020-21, it is taxable on the due basis as income of the financial year 2019-20. This is taxing the salary on the due basis and not on receipt basis. However, if the salary for the financial year 2020-21 is received in the financial year 2019-20, it is known as an advance salary. The advance salary is taxed on a receipt basis. Sometimes, the salary arrears for earlier years are determined and paid in subsequent years. In such cases, the arrears are taxed in the year in which they are received if the same are not taxed in the earlier years. This situation arises in the case of Government servants on account of pay commission increases in salaries or incorporates sector on account of restructuring of employer group companies or because of exceptional situations like Covid-19 pandemic situation.
What is relief on arrear salary?
The income tax on the income is computed and imposed at the tax rates in force in that year. What happens if the salary income was taxable in earlier years when the rates were low and is received in the year (and included in taxable income) when the tax rates are higher. In that situation, it is possible that a taxpayer may end up paying taxes more than his due. In order to avoid this situation, the Income-tax law has a built-in provision for computing tax relief in such situations. Popularly, this tax relief is called as section 89(1) relief. This relief is available only in the case of income from salary and income from a family pension. This relief is only for the purpose to avoid tax at higher rates when in fact the tax was due at lower rates.
How to compute the amount of tax relief?
The amount of relief that you get in the year in which you have received your arrear salary is equal to the excess tax on the arrear salary because of the increase in tax rates in the year of receipt of salary vis-à-vis the tax rates in which the arrear salary was due. This amount of relief is to be computed as per the provisions of Rule 21A of the Income-tax rules and the stepwise computation is as under.
This means that you were supposed to pay tax of ₹15,000/- on the arrears salary in which the tax was due but because it is received in later year the tax computed was at ₹25,000/-. Therefore, you have to claim the difference amount of ₹10,000/- as a relief in your I-T Return.
Any other eligibility conditions?
Yes. This relief is not available unless you submit Form 10E on the income tax website of the Government of India i.e. www.incometaxindiaefiling.gov.in. This form must be submitted before filing the Income-tax return.
However, the employees of the Union Government, State Governments, University, Co-operative society, etc., can file this form 10E with their employer i.e. salary disbursing office responsible for TDS deduction and deposit.