As per section 89(1) of the Income Tax Act, 1961 relief for income tax has been provided when in a financial year an employee receives the salary in arrears or advance. As per Rule 21AA of the Income Tax Rules, 1962, Form 10-E has been prescribed for claiming the relief.
According to the said rule, in case the employee is a Government servant or is an employee of a company, co-operative society, local authority, university, institution or association of body, he/she may for claiming the relief submit the form 10E to his/her employer who is responsible for making the payment of the salary as referred to in sub-section (1) of section 192 of the Income Tax Act, 1961.
In all other cases, the assessee for claiming the relief should file an application in form 10E to his/her income tax assessing officer. The relief under section 89(1) is allowable in the assessment year in which the arrears or the advance is received by the employee.
Pay revisions, particularly in Government Sector, has become common. Since independence six Pay Commissions have been set up by the Government so far. Recommendations of each commission with retrospective effect have resulted in arrears of salaries. The rationale behind giving this relief under section 89 is that due to the payment of arrear or advance salary received in a given financial year, the income of the employee for that financial year gets increased due to the amount of the arrears or advances. As a result, the income of the employee attracts taxation at a higher rate than that rate at which his income would have been taxed had there been no such arrears or advances.
The steps involved in computing the relief under section 89(1) basically involves the following steps:
First- spread out the amount of arrears or advance received over the specific financial year to which they relate and recalculate the income tax for each year had the arrears been received during the concerned financial year itself.
Second-calculate income tax for each of the financial years without taking into account the arrears or the advance received.
Third- deduct the total of income tax arrived at the 2nd step from step-1.
Fourth-calculate income tax for the Financial year in which the arrears is received, including the arrears/advance received.
Fifth- calculate income tax for the Financial year in which the arrears is received, excluding the arrears/advance received.
Sixth- deduct income tax arrived at step-5 from income tax arrived at step-4
Seventh- deduct income tax arrived at step-3 from income tax arrived at step-6
The figure so arrived is the amount of the relief under section 89(1).
Automated salary arrears relief calculator with Form 10E, have been provided to automatically calculate relief from the F.Y.2000-01 to F.Y.2017-18. It is very simple, automatic and user-friendly utility which calls for minimum effort and data input. users are required to fill only data Input sheet (First Page) and it automatically calculates relief and prepares the Form 10E, Table-A, Annexure-I. Macros must be enabled to use this utility.
Data input Sheet