Income Tax Relief under Section 89 for Arrears of Salary Income received in the Year 2015-16 – GConnect Income Tax Relief Calculator

Have you received any Salary Income as arrears this year ? As per Income Tax Act, salary income pertaining previous years which is received as arrears this year has to be included in the total income. However, the tax payer has an option to distribute this arrears to relevant years if such distribution is beneficial in the form of tax savings. Section 89 of Income Tax read with Rule 21 A of Income Tax Rules specifies the procedure for calculation of Income Tax Relief in this case.

Income Tax Relief so calculated has to be declared by the employee to Pay drawing authority (DDO) who is responsible for deducting income tax on salary, in the format described under Form 10E.

GConnect Income Tax Relief Calculator makes the job of salaried employees who have received arrears of salary income this year.

Click here to reach GConnect Income Tax Relief Calculator  for the  arrears received in the year 2015-16

How to use GConnect Income Tax Relief Calculator ?

Enter Net Taxable Income as per ITR / form 16 for the years to which Arrears are to be distributed.

For example arrears received now in the year 2015-16 is pay or allowance for the period from 2008-09 to 2014-15, then split the arrears in to parts equilvalent to arrears of pay applicable to each year from 2008-09 to 2014-15.

• Enter these part values in the boxes given for arrears in the relevant years. Since Taxable Income and arrears for the period from 2005-06 to 2007-08 are not applicable in respect above illustration, ensure that those fields are filled with numerical zeros
• If Income Tax Relief availed in the previous years, enter those in the relevant years to find the actual tax paid in those years
• Click Calculate IT Relief Button after entering all values to find Income Relief applicable for the year 2014-15
• Click Generate Form 10 E Statement button, which will open the filled up Form 10E which is the statutory statement that has to be filed with the employer (DDO in the case of Government Employees) for claiming Income Tax Relief under Section 89 (1) of Income Tax Act.

How Income tax relief under Section 89 is calculated?

This tool calculates income tax by distributing the arrears to the relevant years.

As per Section 89 and other related provisions, Income Tax Relief will be available in the following situation.

1. Arrears received has to be split in to values related to previous years.

2. As a first step, Income Tax of previous years has to be calculated without including distributed arrears. Then Income tax has to be calculated for all these previous years by including the distributed arrears.

3. Difference in income tax on income with arrears and without arrears for each year has to be calculated.

4. All these differential values in income tax has to be added to find out total difference in income tax if Arrears is distributed to previous years . Let it be called as “A”

5. Then Income Tax for the current years without including the total arrears has to be calculated. Also Income tax for the current year after including total arrears has to be calculated. Now difference between these two Income Tax amount is to be taken as “B”

6. If B-A is a negative value or zero, then no income tax relief is available

7. If B-A is positive value then this amount can be deducted from the Income Tax payable for the current which is known as Income Tax Relief under Section 89 (1) of Income Tax Act.

Section 89 of IT Act

Relief when salary, etc., is paid in arrears or in advance.

89. Where an assessee is in receipt of a sum in the nature of salary 89a, being paid in arrears or in advance or is in receipt, in any one financial year, of salary for more than twelve months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary, or is in receipt of a sum in the nature of family pension as defined in the Explanation to clause (iia) of section 57, being paid in arrears, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, the Assessing Officer shall, on an application made to him in this behalf, grant such relief as may be prescribed

Provided that no such relief shall be granted in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company referred to in sub-clause (i) of clause (10C) of section 10, a scheme of voluntary separation, if an exemption in respect of any amount received or receivable on such voluntary retirement or termination of his service or voluntary separation has been claimed by the assessee under clause (10C) of section 10 in respect of such, or any other, assessment year

Rule 21A of IT Rules

Relief when salary is paid in arrears or in advance, etc.

21A.   (1) Where, by reason of any portion of an assessee’s salary being paid in arrears or in advance or, by reason of any portion of family pension received by an assessee being paid in arrears or, by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary, his income is assessed at a rate higher than that at which it would otherwise have been assessed, the relief to be granted under sub-section (1) of section 89 shall be—

          (a)  where any portion of the assessee’s salary is received in arrears or in advance or, any portion of family pension is received by an assessee in arrears, in accordance with the provisions of sub-rule (2);

(b)  where the payment is in the nature of gratuity in respect of past services of the assessee extending over a period of not less than five years, in accordance with the provisions of sub-rule (3);

          (c)  where the payment is in the nature of compensation received by the assessee from his employer or former employer at or in connection with the termination of his employment after continuous service for not less than three years and where the unexpired portion of his term of employment is also not less than three years, in accordance with the provisions of sub-rule (4);

          (d)  where the payment is in commutation of pension, in accordance with the provisions of sub-rule (5); and

          (e)  where the payment is not in the nature of salary paid in arrears or in advance or gratuity in respect of past services or compensation received at or in connection with the termination of employment or in commutation of pension, in accordance with the provisions of sub-rule (6).

(2)(a) In a case referred to in clause (a) of sub-rule (1), the tax payable by the assessee on his total income of the previous year in which the salary is received in arrears or in advance or, in which the family pension is received in arrears (such salary or family pension being hereafter in this sub-rule referred to respectively as the additional salary or additional family pension, as the case may be, and such previous year being hereafter in this sub-rule referred to as the relevant previous year) shall be reduced by the amount, if any, by which the tax on the additional salary or additional family pension, calculated in the manner specified in clause (b), exceeds the tax or the aggregate tax on the additional salary or additional family pension, calculated in the manner specified in clause (c) or clause (d), as the case may be.

(b) Tax shall be calculated on the total income of the relevant previous year as reduced by the additional salary or additional family pension, as the case may be, as if the total income so reduced were the total income of the assessee, and the amount by which the tax so calculated falls short of the tax on the total income before such reduction shall, for the purposes of clause (a), be taken to be the tax on the additional salary or additional family pension, under this clause.

(c) Where the additional salary or additional family pension, as the case may be, relates to only one previous year, tax shall be calculated on the total income of the said previous year as increased by the additional salary or additional family pension, as if the total income so increased were the total income of the assessee, and the amount by which the tax so calculated exceeds the tax payable by the assessee in respect of the total income of the said previous year shall, for the purposes of clause (a), be taken to be the tax on the additional salary or additional family pension, under this clause.

(d) Where the additional salary or additional family pension, as the case may be, relates to more than one previous year,—

           (i)  the previous years to which the additional salary or additional family pension relates and the amount relating to each such previous year shall first be ascertained;

          (ii)  tax shall, then, be calculated on the total income of each such previous year as increased by the amount relating to such previous year ascertained under sub-clause (i); as if the total income so increased were the total income of that previous year, and the amount by which the aggregate amount of tax in respect of the aforesaid previous years as calculated under sub-clause (ii) exceeds the aggregate amount of tax payable by the assessee in respect of the total income of the said previous years shall, for the purposes of clause (a), be taken to be the aggregate tax on the additional salary or additional family pension, under this clause.]

(3)  (a) In a case referred to in clause (b) of sub-rule (1), the tax payable by the  assessee on his total income of the previous year in which the payment by way of gratuity is received (such previous year being hereafter in this sub-rule referred to as the relevant previous year) shall be reduced by the amount, if any, by which the tax on the amount of the gratuity included in the total income of the relevant previous year, calculated at the average rate of tax applicable to such total income, exceeds the tax on the amount of such gratuity, calculated at the rate of tax determined under clause (b) or, as the case may be, clause (c).

(b) Where the payment by way of gratuity is made in respect of past services of the assessee extending over a period of not less than five years but less than fifteen years,—

           (i)  the total income of the assessee in respect of each of the two previous years immediately preceding the relevant previous year shall be  increased by an amount equal to one-half of the amount of the gratuity included in the total income of the relevant previous year, and the average rate of tax for each of the said two previous years shall be calculated as if the total income so increased were the total income of that previous year; and

          (ii)  the average of the average rates of tax for the two previous years immediately preceding the relevant previous year, calculated in accordance with sub-clause (i), shall, for the purposes of clause (a), be the rate of tax determined under this clause.

(c) Where the payment by way of gratuity is made in respect of past services of the assessee extending over a period of not less than fifteen years,—

           (i)  the total income of the assessee in respect of each of the three previous years immediately preceding the relevant previous year shall be increased by an amount equal to one-third  of the amount of the gratuity included in the total income of the relevant previous year, and the average rate of tax for each of the said three previous years shall be calculated as if the total income so increased were the total income of that previous year; and

          (ii)  the average of the average rates of tax for the three previous years immediately preceding the relevant previous year, calculated in accordance with sub-clause (i), shall, for the purposes of clause (a), be the rate of tax determined under this clause.

(4)  (a)  In a case referred to in clause (c) of sub-rule (1), the tax payable by the assessee on his total income of the previous year in which the payment by way of compensation is received (such previous year being hereafter in this sub-rule referred to as the relevant previous year) shall be reduced by the amount, if any, by which the tax on the amount of the compensation included in the total income of the relevant previous year, calculated at the average rate of tax applicable to such total income, exceeds the tax on the amount of such compensation, calculated at the rate of tax determined under clause (b).

(b) The total income of the assessee in respect of each of the three previous years immediately preceding the relevant previous year shall be increased by an amount equal to one-third of the amount of the compensation included in the total income of the relevant previous year, and the average rate of tax for each of the said three previous years shall be calculated as if the total income so increased were the total income of that previous year; and the average of the average rates of tax so calculated for the three previous years shall, for the purposes of clause (a), be the rate of tax determined under this clause.

(5)  (a)  In a case referred to in clause (d) of sub-rule (1), the tax payable by the assessee on his total income of the previous year in which the payment in commutation of pension is received (such previous year being hereafter in this sub-rule referred to as the relevant previous year) shall be reduced by the amount, if any, by which the tax on the payment in commutation of pension included in the total income of the relevant previous year, calculated at the average rate of tax applicable to such total income, exceeds the tax on the amount of such payment, calculated at the rate of tax determined under clause (b).

(b) The total income of the assessee in respect of each of the three previous years immediately preceding the relevant previous year shall be increased by an amount equal to one-third of the amount of payment in commutation of pension included in the total income of the relevant previous year, and the average rate of tax for each of the said three previous years shall be calculated as if the total income so increased were the total income of that previous year; and the average of the average rates of tax so calculated for the three previous years shall, for the purposes of clause (a), be the rate of tax determined under this clause.

(6) In a case referred to in clause (e) of sub-rule (1), the Board may, having regard to the circumstances of the case, allow such relief as it deems fit.

Provision for Form 10 E

Furnishing of particulars for claiming relief under section 89(1).

21AA.  Where the assessee, being a Government servant or an employee in a company, co-operative society, local authority, university, institution, association or body], is entitled to relief under sub-section (1) of section 89, he may furnish to the person responsible for making the payment referred to in sub-section (1) of section 192, the particulars specified in Form No. 10E.

Click here to reach GConnect Income Tax Relief Calculator  for the  arrears received in the year 2015-16