How to Save Tax on Salary Arrears in India?

Many a time we receive the salary due from our employers at a date later than the year the salary was earned in. For instance, if you are a government employee then the implementation of a pay commission report could change your salary or pension amount post facto. Another example is if you are changing jobs just when the financial year is due to end. In that case you could receive the last couple of salaries with your full and final settlement. These types of emoluments, paid after the financial year they were earned, generally qualify as arrears. Besides saving taxes on salary arrears, the Income Tax Act also provides for tax savings through other sections like 80C.

When a payment arrear is received, it changes one’s income tax situation. While you are actually in the X income bracket by virtue of your total taxable income, it might push you up in the income tax slab structure. Moreover, the tax slab might be higher because the government changed it in a particular year. As such the income tax rules have been designed to help you deflect an extraneous income tax slab arising from salary arrears by settling it in the actual years they were earned.

This relief can be sought under Section 89(1) of the Income Tax Act. Section 89(1) allows any citizen to claim the tax benefit for salary received in arrear, gratuity received for past services extending a period of not less than 5 years but less than 15 years, compensation on termination of employment, and payment of commutation of pension.

However, it is mandatory to fill Form 10E to avail the relief. While it is like any other income tax form such as 16A, 16B, 16C it’s always good to know the specifics of a particular form. As such let’s take a look at a step by step process of how to fill 10E.

How to fill 10E?

• Visit www.incometaxindiaefiling.gov.in to file 10E
• Login with your PAN card details and password
• Click on the ‘e-File’ option on the status bar on top after you have successfully logged in
• Now select the option of Income Tax Forms from the drop down menu
• Select Form 10E- Form for Relief u/s 89 from the drop-down box of Form Name
• Now, choose the relevant Assessment Year and Submission Mode to continue further
• A new page will appear — the first tab in in this page will have important instructions and tips on how to fill 10E such as saving as you go, adding rows to enter more values etc
• In the second tab, you will find basic details like name, address, PAN number etc already filled. Choose the residential status from the drop-down menu
• Now, you need to fill the relevant annexure. There will be four — one for salary arrear or premature withdrawal of provident fund, and one each for commutation of pension, compensation received on termination of employment, relief in gratuity payment for 5-15 years of service and relief for gratuity for service rendered in excess of 15 years
• Verify the form and then select preview & submit.
• You can also correct errors in the form if you spot any before submitting by clicking on ‘Edit’
• You should download a PDF copy for future reference
• If you are unable to fill up the form at one go, then you can select ‘Save Draft’ which will allow you to complete it later where you left off
• To get into the saved draft version you have to follow the first few steps in the same manner

Checking eligibility and tax relief under section 89(1)

• Determine the tax payable on the total income, including the arrear, in the year it is received.
• Determine the tax payable on the total income, excluding the arrear, in the year it is received.
• Find out the difference between the amounts arrived at in the previous two steps
• Determine the tax payable on the total income, including the arrear, in the year the arrear amount arose.
• Determine the tax payable on the total income, excluding the arrear, in the year the arrear amount arose.
• Find out the difference between the amounts arrived at in the previous two steps
• Only if the amount arrives at in Step (3) is more than that in Step (6), you are eligible to claim relief under Section 89(1).

Important points to remember

• The income tax department has made it compulsory to file Form 10E if you want to avail the relief under section 89(1) since financial year 2014-15 (assessment year 2015-16)
• You should choose the assessment year in which you have received the arrears. For instance, if salary arrears are received in 2019-20, choose assessment year 2020-21
• Your employer could seek a confirmation from you regarding the submission of Form 10E before making adjustments to your taxes and allowing tax benefits. It is not, however, compulsory to submit a copy of your 10E to the employer
• Tax relief under Section 89(1) is also applicable for those who receive family pension in arrears. You can determine your eligibility in the same manner as mentioned above
• If you have filled 10E after filing of your income tax returns, then the Income Tax Department might not permit the Section 89(1) relief claimed in ITR.
   

More tax benefits

Click here to use - Income Tax Calculator

Besides saving taxes on salary arrears, the Income Tax Act also provides for tax savings through other sections — most notably through Section 80C which allows you to save tax on life insurance or term insurance premiums. You avail a tax deduction up to Rs 1,50,000 through your life insurance and term insurance premiums.

If you are planning to buy a life insurance policy or a term insurance cover, do consider the iSelect Smart360 Term Plan from Canara HSBC Life Insurance - with premiums starting as low as Rs 12 per day. It is a tailor-made plan with a whole life cover, return of premium, multiple payout options, increase coverage option and tax benefits.