It is quite common (mostly in the case of Govt. employees) to get salary arrears i.e. there is an increment in Salary from the backdate and the person gets the accumulated effect of that increment during a particular year. This increases the salary for the particular year which in turn increases the tax burden on the taxpayer or the person who gets salary arrears.
To handle such a situation, the Income-tax act provides relief u/s 89(1) read with rule 21A of the Income-tax Rules.
Basically, it is a provision that provides a method of calculation of tax on arrear salary by taking the arrear to the respective year for which the arrear has been given. Let us understand the concept with an example :
Mr. Aniket is a Govt. servant and his gross salary for F.Yr. 2020-21 is Rs.900000/-. During this year, he gets an increment of salary and the salary arrear is provided to him on Dec.20 of Rs.250000/-.
The bifurcation of salary arrear is as under :
Relating to F.Yr. 2017-18 Rs.100000/-
Relating to F.Yr. 2018-19 Rs.150000/-
Thus his tax calculation will be as under :
For F.Yr. 2020-21
Gross Salary Rs.900000
Arrear of Salary Rs.250000
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Total Income Rs.115000
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Tax on Total Income Rs. 163800 (with Salary Arrear)
Tax on Total Income Rs. 96200 (without salary arrear)
Additional Tax payable Rs. 67600 (due to arrear) -- A
Now Mr. Aniket wants to know whether he would be able to get any relief on account of section 89(1). His Gross Salary for F.Yr.2017-18 was Rs.550000/- and for F.Yr. 2018-19 was Rs.750000/-.
Thus the relief u/s 89(1) will be calculated by taking the arrear in the year of accrual of salary and calculating the tax thereon
For F.Yr. 2017-18
Gross Salary Rs.550000/-
Arrear of Salary Rs.100000/-
Tax on Total Income Rs. 13000/- (without arrear)
Tax on Total Income Rs.44200/- (with salary arrear)
Additional Tax payable Rs.31200/- B
For F.Yr. 2018-19
Gross Salary Rs. 750000/-
Arrear of Salary Rs. 150000/-
Tax on Total Income Rs. 65000/- (without arrear)
Tax on Total Income Rs. 96200/- (with salary arrear)
Additional Tax payable Rs. 31200/- C
Total Additional Tax payable for F.Yr.17-18 & 18-19 B+C Rs.62400/- - D
Here the additional tax payable by Aniket, if he would have received the arrear in respective years, would be Rs.62400/- whereas the additional tax payable in F.Yr. 2020-21 is Rs.67600/- due to arrears received. Thus the net additional tax liability of Rs. 5200/- (i.e. 67600-62400) would be the relief u/s 89(1).
To claim the above relief u/s 89(1), the taxpayer is required to fill form No. 10E online at the income tax portal by logging in to his account. The form is available in online mode only.