If you’ve ever received arrears of salary, advance salary, or even commuted pension, you might have noticed a sudden spike in your income—and your tax bill.
This happens because such payments, though related to earlier years, are taxed in the year of receipt, which can push you into a higher tax slab.
To prevent this unfair tax impact, the Income Tax Act provides relief under Section 89. This relief allows you to recalculate your tax as if the income had been received in the correct financial year, thereby lowering your tax liability.
Let’s break down how it works and how to claim it correctly.
✅ What Is Section 89 of the Income Tax Act?
Section 89 offers tax relief when salary or other qualifying income is received in arrears or advance. It’s a provision that ensures you aren’t penalised due to timing mismatches between earning and receiving income.
You’re eligible to claim relief if you receive:
- Salary arrears (due from previous financial years)
- Advance salary
- Gratuity (for past services)
- Commuted pension
- Leave encashment
- Family pension arrears
The relief is not automatic. You must calculate it properly and file Form 10E on the income tax portal before filing your return.
📋 When Is Section 89 Relief Applicable?
|
Situation |
Is Relief Allowed? |
|
Salary received late (arrears) |
✅ Yes |
|
Advance salary received |
✅ Yes |
|
Gratuity for past services (up to 15 yrs) |
✅ Yes (special calculation) |
|
Leave encashment received in a lump sum |
✅ Yes |
|
Pension commuted in a lump sum |
✅ Yes |
|
Bonus paid for earlier years |
✅ Yes |
💡 If the extra income increases your slab rate, Section 89 allows tax to be recalculated as if the income had been spread over earlier years.
🧾 Example to Understand Section 89 Relief
Let’s say:
- Your regular salary in FY 2023–24 is ₹8 lakh
- You receive arrears of ₹2 lakh for FY 2021–22
Without relief:
- Total taxable income = ₹10 lakh
- Higher tax bracket → more tax
With Section 89:
- Tax is recomputed for FY 2021–22 by adding ₹2 lakh to that year’s income
- Relief = difference between the increased tax in 2023–24 and what you would have paid in 2021–22
This ensures that the extra tax due to arrears is adjusted fairly.
📑 How to Claim Section 89 Relief (Step-by-Step)
- Compute tax for the current year with and without arrears
- Compute tax for the relevant previous year(s) with and without arrears
- Calculate relief = Extra tax due this year – Extra tax that would have been due earlier
- File Form 10E on the Income Tax Portal
- Mention the relief amount in your ITR under “Relief under Section 89”
📌 Filing Form 10E is mandatory. Without it, your ITR may get flagged or processed without relief.
🧠 People Also Ask
❓ What happens if I don't file Form 10E?
Your ITR may get processed without relief, and you may face a tax demand. In many cases, the CPC sends a notice asking for Form 10E if not been filed.
❓ Can Section 89 relief reduce tax to zero?
It depends on how much the tax increase was caused by the arrears. It may reduce total tax, but it rarely eliminates it.
❓ Is it available under both old and new tax regimes?
Section 89 relief is available only in the old regime. The new tax regime under Section 115BAC does not permit this relief. "
❓ Is relief allowed for performance bonuses or incentives?
Yes, if these relate to past financial years and were paid in a lump sum, they may qualify for relief under Section 89.
⚠️ Common Mistakes to Avoid
- Forgetting to file Form 10E
- Calculating relief manually without matching year-wise slab changes
- Declaring arrears as income but not claiming relief
- Filing under the new tax regime when planning to claim Section 89
- Submitting wrong figures in the ITR without verifying the Form 16 split
🎯 Final Thoughts from a CA’s Desk
“Section 89 is your legal cushion against unfair tax on past dues—use it wisely.”
Whether you received DA arrears from a government job, backdated increments, or leave encashment after retirement, you shouldn’t be punished for a delay in payment.
Tax rules allow you to correct this mismatch—but only if you file smartly and on time.
📞 Need Help Calculating Arrears Relief or Filing Form 10E?
At CallmyCA, we help:
- Calculate accurate Section 89 relief across years
- File Form 10E online without errors
- Upload and report arrears correctly in your ITR
- Ensure smooth ITR processing and refund, if applicable
👉 Click here to book your Form 10E & salary arrears tax help via CallmyCA
