Arrears Received: Claim Relief u/s 89 of the Income Tax Act, 1961

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Arrears Received: Claim Relief u/s 89 of the Income Tax Act, 1961

A salaried individual always aims for increment in position. One aims for increase in job profile so as to get better salary. In large organizations, generally it takes time for calculation of pay hike and payment of the increment. The organizations pay the increments in form of Arrears in coming years.

On account of arrears of salary employee may claim the benefit of Section 89A of the Income Tax Act, 1961. The logic being, arrears shall be taxable in the year to which it pertains and not the year in which it is received.

Due to the time gap between salary due and salary receipt the taxability also change. The taxability may change due to change in tax slab rates or basic exemption limit or Rebate u/s 87A.

The income shall be taxed at the original rates of the year to which it pertains and to make that possible Relief u/s 89 is introduced by Government.

Section 89 is applicable if

  • any portion of salary of an assessee is paid in arrears or in advance
  • or is received in any one financial year salary for more than twelve months
  • or a payment of profit in lieu of salary under section 17(3)

and income of employee is assessed at a rate higher than that at which it would otherwise have been assessed.

Employee needs to make an application to the Assessing Officer and Assessing officer shall grant such relief as prescribed. The procedure for computing the relief is given in Rule 21A.

On account of family pension:

Similar tax relief is extended to assessees who receive arrears of family pension as defined in the Explanation to clause (iia) of section 57.

“Family pension” means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death.

No relief at the time of Voluntary retirement or termination of service:

No relief shall be granted in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of his service if exemption under section 10(10C) in respect of such compensation received on voluntary retirement or termination of his service or voluntary separation has been claimed by the assessee.

Example for computation of Rebate u/s 89:

Ms. Leela, turned 25 years on 26.01.2018, has earned salary for the previous year 2017-18 is Rs. 12,48,000 and arrears of salary received of Rs.2,21,000. Arrears are attributable to earlier years as follows:

  Previous Year   Taxable Salary Arrears now received              (Rs. )
2010 – 2011 8,09,000 68,000
2011 – 2012 9,12,000 1,21,000
2012 – 2013 9,72,000 32,000

Compute the relief available under section 89 and the tax payable for the A.Y. 2018-19 given education Cess of 3%.

Rates of Taxes:

Slabs Rate
2011–12 UptoRs. 1,60,000 Nil
Rs. 1,60,000 – Rs. 5,00,000 10%
Rs. 5,00,000 – Rs. 8,00,000 20%
Above Rs. 8,00,000 30%
2012–13 Upto Rs. 1,80,000 Nil
Rs. 1,80,000 – Rs. 5,00,000 10%
Rs. 5,00,000 – Rs. 8,00,000 20%
Above Rs. 8,00,000 30%
2013–14 Upto Rs. 2,00,000 Nil
Rs. 2,00,000 – Rs. 5,00,000 10%
Rs. 5,00,000 – Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Computation of tax payable by Mr. Hari for the A.Y.2018-19

          Particulars Incl. arrears of salary Excl. arrears of salary
Rs. Rs.
Current year salary 12,48,000 12,48,000
Add: Arrears of salary 2,21,000
Taxable Salary 14,69,000 12,48,000
Income-tax thereon 2,53,200 1,86,900
Add: Education cess @2% plus SHEC@1% 7,596 5,607
Total payable 2,60,796 1,92,507

Particulars A.Y. 2011-12 A.Y. 2012-13 A.Y. 2013-14
Incl. arrears

 

Excl. arrears

`

Incl. arrears

 

Excl. arrears Incl. arrears

 

Excl. arrears

`

Taxable salary 8,09,000 8,09,000 9,12,000 9,12,000 9,72,000 9,72,000
Add: Arrears of salary 68,000 1,21,000 32,000
Taxable salary 8,77,000 8,09,000 10,33,000 9,12,000 10,04,000 9,72,000
Tax 1,17,100 96,700 1,61,900 1,25,600 1,31,200 1,24,400
Add: Cess@3% 3,513 2,901 4,857 3,768 3,936 3,732
Tax payable 1,20,613 99,601 1,66,757 1,29,368 1,35,136 1,28,132

    Particulars             Rs.          Rs.     
Tax payable in A.Y.2018-19 on arrears:
Tax on income including arrears 2,60,796
Less : Tax on income excluding arrears 1,92,507 68,289
Tax payable in respective years on arrears:
Tax on income including arrears (120613+166757+135136) 4,22,506
Less: Tax on income excluding arrears (99601+129368+128132)  

3,57,101

65,405
Relief under section 89 – difference between tax on arrears in A.Y 2018-19 and tax on arrears in the respective years 2,884

Computation of Tax:

Particulars Rs.
Income-tax payable on total income including arrears of salary 2,60,796
Less : Relief under section 89 as computed above 2,884
Tax payable after claiming relief 2,57,912


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