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Tax Saving Tips on Arrear Amount, Section 89(1) & Form 10E

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By Arpit Kulshrestha
How to Save Tax Easily on Arrear Amount?

When an individual's income tax liability increases due to the receipt of arrears or additional payments, it is typically because these amounts are added to their total income for the current financial year. This addition of increased income can push the individual into a higher tax bracket, resulting in a higher tax liability.

Arrears can be considered in various forms, such as salary, pension, rent, or any other income that was meant to be received in earlier years but faced delays or withholding. Once these arrears are eventually paid to the individual, they are considered taxable income for the year in which they are received.

For instance, if an employee earns salary arrears in 2022 that actually pertains to 2021, the arrears will be liable to a higher tax rate in 2022.

In such situations where a taxpayer's tax liability increases due to arrears, they may expect relief under Section 89(1) of the Income Tax Act, 1961. This relief provision can help reduce the taxpayer's tax burden.

Overview of Section 89(1) of the IT Act, 1961

Section 89(1) of the Income Tax Act, 1961, offers relief from tax on salary arrears. This relief is available to employees who receive a salary in a financial year, but the salary arrears relate to a previous financial year.

Under this section, individuals can claim relief by calculating the tax liability on the total income for the year in which the arrears or additional payments are received, taking into account the relief for the previous years when the income should have been originally taxed.

The following method is used to estimate the amount of relief available under Section 89(1):

  • Calculate the tax liability for the year in which the arrears are received.
  • Calculate the tax liability for the year to which the arrears relate, as if the arrears had been received in that year.
  • The difference between these two tax liabilities represents the amount of relief available.

ITR Filing: How to Make a Section 89(1) Relief Claim

The employee must submit Form 10E in order to claim relief under Section 89(1).

A larger tax liability arising from the accumulation of income in a specific year is intended to be avoided by Section 89(1) in order to avoid undue hardship.

Individuals can guarantee that they are taxed at the average rate applicable to their income spread across the relevant years by making use of the exemption provided by this provision.

It is significant to remember that the relief provided by Section 89(1) only applies to income from salaries and pensions, not income from businesses or professions.

Questions Concerning Form 10E:

  • What Is Form 10E?
Relief can be claimed under section 89 in case of receipt in arrears or any advance payment as a salary. Form 10E is required to be filed for claiming such relief before filing the income tax return.

  • Does Form 10E Need to be Downloaded and Submitted?

No, you can submit the Form 10E online after login to the e-filing portal, so there is no need to download it.

  • When to File Form 10E?

You should file Form 10E before filing income tax return.

  • Is It Mandatory to File Form 10E?

Yes, it is mandatory to file Form 10E in order to claim a tax relief on arrear/advance income.

  • What If You Claim Relief Under Section 89 in ITR Without Filing Form 10E?

If you do not file Form 10E and claim relief u/s 89 in your ITR, your ITR will be processed but the relief claimed under Section 89 will not be allowed.

How to Get to Know that the IT Department Has Rejected the Claim in My ITR?

After your ITR has been processed, the ITD notifies you via an intimation under Section 143(1) if the relief you requested under Section 89 is disallowed.

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