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Relief if Salary is received in Arrears or in Advance - Section 89(1) - Income Tax - Ready Reckoner - Income TaxExtract TAX RELIEF u/s 89(1) Tax is calculated on your total income earned or received during the year. If you have received any portion of your salary in arrears or in advance , or your have received family pension in arrears, you are allowed some tax relief under section 89(1). For a taxpayer, tax liabilities for a Financial Year are calculated from the income earned during that year. Sometimes, that income includes arrears (past dues paid in the current year). Usually tax rates increase with time which means that you may have to pay higher taxes in such case. However, Income Tax Act provides you relief in those situations u/s 89(1). COMPUTATION OF RELIEF IF SALARY RECEIVED IN ARREARS OR IN ADVANCE The relief on salary received in arrears or in advance (i.e. additional salary) is computed in the manner laid down in rule 21A(2) as under: 1. Calculate tax payable on the total income, including additional salary in the year it is received 2. Calculate tax payable on the total income, excluding additional salary in the year it is received 3. Calculate difference between Step 1 and Step 2 4. Calculate tax payable on the total income of the year to which the arrears relate, excluding arrears 5. Calculate tax payable on the total income of the year to which the arrears relate, including arrears 6.Calculate difference between Step 4 and Step 5 7. Excess of amount at Step 3 over Step 6 is the tax relief that shall be allowed. Note: If amount at Step 6 amount at Step 3, no relief shall be allowed. Points to remember: The relief u/s 89 is to be given in the assessment year in which the extra payment by way of arrears, advance, etc. is taxed. The encashment of leave salary on retirement whether on superannuation or otherwise has already been exempted us 10(10AA) . No relief shall be granted in respect of any amount received by the assessee on his voluntary retirement, if an exemption in respect of such amount has been claimed by the assessee u/s 10(10C) in respect of such AY. FILING FORM 10E : The Income Tax Department has made it mandatory to file Form 10E if a taxpayer wants to claim relief under Section 89(1). As per Section 89(1), tax relief is provided by recalculating tax for both the years, the year in which arrears are received and the year to which the arrears pertain. The taxes are adjusted assuming arrears were received in the year in which they were due.
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