RECIEVED SALARY ARREARS?

You would naturally be concerned about having to pay a higher tax on such earnings if your total income included any past dues received as arrears in the current year. Your tax rate may increase if you add your income from the prior year.

Do not fret. In these situations, you might be able to make use of Section 89(1) of the Income Tax Act, 1961.

The purpose of the relief provided to taxpayers under Section 89 of the Income-tax Act of 1961 is to save you from any additional hardship caused by a delay in receiving arrears. Simply put, if you were in a lower tax bracket for the year you received the money and there was a delay in payment delivered to you, you do not owe more in taxes.

In situations like this, you might pay more in taxes if your company settles your past dues within the current fiscal year. It's possible that you paid less in taxes the previous fiscal year. However, the wage arrears may push you into a higher tax bracket.

However, by requesting tax exemption under Section 89(1) of the Income Tax Act, 1961, you can avoid paying higher taxes on such delayed income. Although, in order to take advantage of this benefit, you must submit Form 10E using the income tax authorities' online filing system. The steps and techniques are as follows: 

Steps to file Form 10E

1. Go to the website

   https://incometaxindiaefiling.gov.in/.

2. Log into your e-filing account using your User ID, password and date of birth.

3. Click on the ‘e-File’ tab and select ‘Income Tax Forms.’

4. On the next screen, enter your PAN and select ‘FORM NO 10E’ under the ‘Form Name’ drop-down menu.

5. Choose the correct Assessment Year (AY) for which you need to file Form 10E.

6. Opt. for the Submission Mode you prefer.

7. Provide relevant details and select ‘Save Draft.’

8. Since you are filing the form for salary arrears, select Annexure-I and enter applicable information.

9. Verify the form.

10. Click on the ‘Preview and Submit’ button and check your entries before submitting.

How to determine if you qualify for the tax relief?

As per Section 89(1), to apply the tax relief the income taxes for both the year in which the salary was due and the year when you received it are recalculated.

• Calculate the tax payable for the year in which you received the arrears. First, calculate by including the arrear amount in your taxable income. Then calculate after excluding it.

• Subtract the second amount from the first. This difference is the tax on the arrear. Suppose this sum is A.

• Now, determine the payable tax for the year in which the salary was delayed without adding the arrear.

• Again, find out the tax payable after adding the arrear to your taxable amount.

• Compute the difference between the two tax amounts. Suppose this sum is B.

If A is higher than B, you can avail of the 89(1) relief.

Moreover, there are certain things to keep in mind: 

1. Which AY should you select while submitting Form 10E?

   Even if the salary arrears are for a previous year, you must choose the AY during which you received them. You must choose AY 2020-2021, for instance, if you received arrears for the 2019–2020 fiscal year.

2. When should Form 10E be submitted, before or after the income tax return (ITR) is filed?

   Form 10E must be submitted before your ITR because it is required. Otherwise, your return won't be processed by the tax authorities.

3. Does the ITR need to include a copy of Form 10E?

   Form 10E must be submitted electronically. Since all ITRs are annexure-less, you are not required to include a copy of the form with your ITR. For your tax records, you might wish to retain a copy with you, though. In the future, the AO might request these records.

   Although it is not required, your employer may request a copy of the submission confirmation when submitting Form 10E.

4. Who may submit Form 10E?

   Any salaried employee employed by one of the following organisations may provide information on arrears received in Form 10E: Governmental organisation, business, university, local government, cooperative society, and organisation or body

Final Note:

If you claim exemptions under Section 89(1) in the ITR without first filing Form 10E, the tax department will send you a non-compliance notice. As a result, be sure to properly complete and submit this form.