When it comes to salary payments, life isn't always linear. Sometimes, you receive arrears for past services or an advance for the future. And when such irregular income inflates your annual earnings, it might push you into a higher tax bracket. That’s where Section 89(1) of the Income Tax Act steps in, providing much-needed relief when salary, etc., is paid in arrears or in advance.
What is Section 89(1)?
Section 89(1) of the Income Tax Act is a tax relief benefit to taxpayers who receive income in arrears or advance. It smooths the tax burden by recalculating the tax liability had the income been received in the rightful financial year. In simple terms, it offers tax relief for delayed salary received in the form of arrears. “
Let’s say you received ₹2,00,000 as arrears this year for work you did two years ago. Without relief under section 89(1), the entire amount is taxed in the current year, which may lead to higher taxes. But with this provision, your tax is adjusted to distribute that income over the years it pertains to.
Who is eligible?
An assessee is eligible for tax relief under Section 89(1) if they’ve received:
- Salary arrears
- Advance salary
- Family pension arrears
- Gratuity for past services
- Compensation on termination of employment
The section applies to both government & private sector employees, making it highly relevant for the salaried class.
How Does Section 89(1) Provide Tax Relief?
To understand how this relief works, here’s a simplified process:
- Calculate total tax liability for the current year (with arrears included).
- Calculate total tax liability for the current year (without arrears).
- Find the difference – this is the extra tax due to arrears in the current year.
- Recalculate tax liability for the year(s) to which the arrears belong, as if the arrears were received then.
- The relief amount is the difference between the extra tax due now & the tax that would have been due then. “
Illustration Example
Suppose Mr. Sharma received ₹1,50,000 as salary arrears for FY 2021-22, but the amount was paid in FY 2024-25. Due to this arrear, his total income for 2024-25 increases significantly, causing additional tax liability. Section 89(1) ensures the arrear income is taxed as if it were received in 2021-22, reducing the excessive tax burden.
Important Notes:
- Relief is allowed only on actual receipt of arrears or advance, not on notional income.
- Form 10E must be submitted before filing your income tax return to claim relief.
- The relief doesn’t eliminate tax liability but reduces the spike in taxable income in a single year.
Form 10E – The Compliance Key
To claim this benefit, filing Form 10E electronically is mandatory before submitting your ITR. Without this form, your claim under Section 89(1) can be rejected by the department, no matter how valid it is.
You’ll be required to mention:
- Amount of arrears or advance
- The year it pertains to
- Calculation sheet comparing tax liability across years
Real-Life Scenarios Where Section 89(1) Helps
- Teachers receiving a salary after the revision
- Government employees awarded pay commission arrears
- Individuals getting leave encashment after retirement
- Professionals receiving past due post-employment change
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