What is relief u/s 89?

Have you ever heard of salary arrears? It’s when you receive the amount of salary for work that was done in the past. For example, let’s say you were supposed to receive a salary increment last year, but it is paid to you in later months. That additional money you receive in the following FY would be considered salary arrears.

Now, the thing about salary arrears is that they can be a bit tricky when it comes to taxes. So here we have tried to ease some pain by explaining the arrears and its tax caculation.

Section 89 allows for an exemption of tax on salary arrears in certain situations, for example, if you received any outstanding salary in a different assessment year.

This is where section 89 comes in, where you can apply for relief and spread out the tax liability. Here, if you were to pay tax on the full amount in the year you receive it, your tax liability would be much higher than it would have been if you had received the money in the year it was actually payable to you.

Let’s say your total income for the FY 2022-23 is ₹6,00,000 (₹50,000 per month) and your salary increased to ₹8,40,000 (₹70,000 per month) in April 2023, which is effective from 1st January 2022.

So overall you received salary arrears of ₹60,000 in April, for the months Jan, Feb and March as well.

Considering the old tax regime and standard deduction, your tax liability without relief for AY 2023-24 would be ₹82,500. However, if you apply for relief under section 89, your tax liability would be reduced to ₹70,500.

Here’s a detailed example of how to calculate the amount of tax relief u/s 89(1) for salary arrears.

Now, how would you claim this relief? The employer will calculate relief u/s 89 and report in Form 16. Then you (the employee) can claim such relief while filing your ITR.

However, there’s a catch, the ITD has made it mandatory to file Form 10E if you want to claim relief under section 89(1). The reason is that without it, you won’t be able to claim relief under section 89(1), even if you’re eligible for it and you’ll end up paying more taxes than you should.

So, if you ever find yourself in a situation where you receive salary arrears, make sure to check if you’re eligible for relief under section 89. It can help you save some money on taxes!

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