You have been working hard for your employer for the past few years, and you get a pay hike effective from backdate. You get super excited to get a big fat cheque from your employer as payment for your salary arrears. You are overjoyed to spend the money on your needs and wants. But wait, there is a catch. You have to pay taxes on the salary arrears as well.
Sounds complicated? Don’t worry; we are here to help you understand this concept and how to apply it in your case. This article will explain salary arrears, how they are taxed, and how to claim tax relief. We will also provide some examples and tips to make the process easier. By the end of this article, you can save money on taxes and enjoy your salary arrears without any guilt or stress. So, let’s begin!
What is Salary Arrears?
Salary arrears are the payments you receive from your employer for the previous months or years when you were underpaid or unpaid. These payments are usually made when there is a revision in the salary structure, a court order, or a settlement agreement.
Salary arrears can arise due to various reasons, such as:
- Change in salary scale or grade due to promotion, increment, or dearness allowance
- Retrospective effect of a new pay commission or wage board
- Error or omission in salary calculation or payment
- Delay in salary payment due to financial difficulties of the employer
- Dispute or litigation between the employer and the employee
- Premature withdrawal from provident fund
- Family Pension arrears
- Gratuity payment
- Commutation pension received
How Are Salary Arrears Calculated?
To simplify the calculation of salary arrears, let us assume you get a monthly salary of Rs. 20,000. You have been working for more than two years now. Impressed by your performance, your employer approved a salary hike of Rs. 5000/- in June. Now, due to some problems in the backend processes, you start getting your increased salary in November. You will get salary arrears for June to November and your high salary.
So, in November, you will get Rs. 30,000/- (Rs. 5000*6) as salary arrears.
How are Salary Arrears Taxed?
The joy of getting an arrear is instantly clouded with worries of “Are Salary Arrears Taxable?”. Income tax is calculated on your income in a particular financial year from one or more sources. However, receive your salary for the previous year(s) in the current year for various reasons, such as salary revision or dispute resolution. It may increase your tax liability.
The salary arrears will add to your tax liability in the current year as your income may fall into a higher tax bracket or face a change in the tax rates. You can claim relief under Section 89(1) on your salary arrears to avoid this hardship.
This relief allows you to reduce your tax burden by adjusting the salary arrears with the tax rates of the previous year (s) to which they relate. Your employer should also calculate and indicate this relief in your Form 16. By claiming this relief, you can save taxes on your delayed salary and avoid paying more than you owe.
How to Claim Relief under Sec 89(1) on Salary Arrears?
A simple tax concept follows in the case of salary arrears. If you have paid taxes in the year the salary was due, you should not be taxed again in the payment year.
- Step 1: Check your salary slip for any salary arrears paid in the current year.
- Step 2: Calculate the tax relief under Section 89 (1) by following the steps given above.
- Step 3: Fill out Form 10E online on the income tax portal by providing the details of your income and arrears for the current year and the previous year (s) to which they relate. You cannot claim relief under sec 89 if you miss out on this form.
- Step 4: Select the relevant assessment year and choose the applicable form for Salary Arrears. Fill in the required information, like the current year and the relevant year to which the arrears belongs.
- Step 5: You must also mention the amount of relief and the acknowledgment number of Form 10E in your income tax return. Your employer should also calculate and indicate this relief in Part B of Form 16.
- Step 6: Opt for e-verification through Aadhar OTP/Net Banking/ etc.
Salary arrears is a common phenomenon for many employees who receive their salary for the previous year (s) in the current year on account of wage settlement or pay fixation. While salary arrears are taxable in the year of receipt, they may also increase your tax liability due to changes in the tax rates or brackets.
However, you don’t pay more than you owe, as income tax laws provide relief under Section 89 (1). This relief lets you adjust your arrears with the tax rates of the previous year(s) to which they relate.
To avail of this relief, you must follow some simple steps and fill out Form 10E online on the income tax portal before filing your income tax return. You must also report the amount of relief and the acknowledgment number of Form 10E in your income tax return. Your employer should also reflect this relief in your Form 16. By claiming this relief, you can ensure that your salary arrears are taxed fairly and accurately.
Is Form 10E mandatory to file?
Yes, Form 10E is mandatory to file if you want to claim tax relief on salary arrears or advance salary. It should be filed online on the income tax portal before filing your income tax return for the year the arrears are received.
What will happen if I fail to file Form 10E but claim relief under Section 89 (1) in my income tax return?
If you fail to file Form 10E but claim relief under Section 89 (1) in your income tax return, your income tax return will be processed, but the relief claimed under Section 89 (1) will not be allowed. You may even receive an intimation from the tax department.
Do I also need to submit a copy of Form 10E to my employer?
No, it’s not mandatory for you to furnish a copy of the form 10E filled by you to your employer. Your employer may ask for it to adjust the taxes and allow tax relief if required.