Salary arrear tax liability – Minimize with Udaipur Best CA

Got paid for previous years’ work recently? Find out how this CA in Udaipur and Tax Consultant in Udaipur recommend you plan your income tax to avoid overpaying tax on past dues and arrears received this year

What is relief under section 89(1)?

Tax is calculated on your total income earned or received during the year. If your total income includes any past dues paid in the current year, you may be worried about paying a higher tax on such arrears (usually, tax rates have gone up over the years plus the addition of past income increases your tax slab rate).

To save you from any additional tax burden due to delay in receiving income, the tax laws allow a relief under section 89(1). In simple words, you do not pay more taxes if there was a delay in payment to you and you were in a lower tax bracket for the year you received the money.

An employee must meet certain conditions to claim relief under this section. To start with, Section 89 reliefs can be claimed on any of the following received during a particular year:

a) Salary received in arrears or in advance

b) Premature withdrawal from Provident Fund

c) Gratuity

d) Commuted value of pension

e) Arrears of family pension

f) Compensation on termination of employment

How to calculate tax relief under Section 89(1) on salary arrears:-          

If in case of receipt of past salary, salary in advance or receipt of family pension in arrears, you are allowed some tax relief under section 89(1).

Here’s how you can calculate the tax relief yourself –

Step 1:

Calculate tax payable on the total income, including additional salary – in the year it is received. The arrears provided will reflect in Part B of Form 16.

Step 2:

Calculate tax payable on the total income, excluding additional salary in the year it is received. You can get the amount of additional salary (Arrears) from the arrear document given by your employer. You have to subtract the arrear from the total salary received (including the arrears), which can be taken from your Form 16. This calculation will give you the exact amount of tax liability in the given year if there were no arrears.

Step 3:

Calculate the difference between Step 1 and Step 2.

This will give you the additional tax liability created due to arrears of income.

Step 4:

Calculate tax payable on the total income of the year to which the arrears relate, excluding arrears.

Step 5:

Calculate tax payable on the total income of the year to which the arrears relate, including arrears

Step 6:

Calculate the difference between Step 4 and Step 5.

This will calculate the actual tax liability in any past year pertaining to which arrears have been received in the current year, had the full arrears received in the same past year.

Step 7:

Excess of the amount at Step 3 over Step 6 is the tax relief that shall be allowed. If the amount in Step 6 is more than the amount in Step 3, no relief shall be allowed. Alternatively, you may follow the steps on the income tax website to calculate the tax arrears. Once you have calculated this amount, you can enter the values on Clear tax and proceed to file your return.

Unsure how to calculate tax on past income arrears received this year? This post by a CA in Udaipur and Tax Consultant in Udaipur provides a step-by-step guide to income tax planning and saving more when you get paid for previous years’ work.