Filing Form 10E: Claim Relief Under Section 89(1) of the Income Tax Act

When an individual receives salary arrears or a lump sum payment, it often results in a higher-than-usual taxable income for the year. This spike in income can push you into a higher tax bracket, leading to a substantial tax burden. To alleviate this burden, the Income Tax Act allows relief under Section 89(1) for individuals who receive salary in arrears or in advance. To claim this relief, Form 10E must be filed.

In this blog, we will break down the steps to file Form 10E, the significance of Section 89(1), and the types of relief you can claim.

What is Section 89(1) of the Income Tax Act?

Section 89(1) provides relief to taxpayers who are receiving salary arrears or advance salary payments. This section allows taxpayers to reduce their tax liability by calculating the tax as if the salary was received in a manner that spreads over more than one year.

The primary aim of Section 89(1) is to ensure that taxpayers are not unfairly taxed due to a one-time increase in their income, which could push them into a higher tax bracket.

This section is especially helpful for employees who may receive:

Salary Arrears: Payment for previous years that were not received earlier but are paid in the current year.
Advance Salary: Salary paid in advance for future periods but taxed in the current year.

How Section 89(1) Works?

If a taxpayer receives salary arrears or advance salary, it is treated as additional income for the current year. This sudden increase in income may result in higher taxes. Section 89(1) allows the taxpayer to spread this income across the relevant years in which the salary should have been received, thereby reducing the overall tax liability.

How does it work?

Normal Tax Calculation: First, calculate the total tax payable on your actual income in the year of receipt (including arrears/advance salary).
Recalculate Tax with Spreading of Income: Spread the salary arrears or advance salary across the previous year(s), and recalculate the tax that would have been payable if the salary was received in those years.
Claim Relief: The difference between the tax paid in the current year and the tax that would have been payable in earlier years is the relief you can claim under Section 89(1).

This results in the taxpayer being taxed at the lower rates applicable for previous years, reducing the overall tax burden.

When is Form 10E Required?

Form 10E is required to claim relief under Section 89(1). It provides details of how the arrears/advance salary is distributed across the relevant years and calculates the tax relief accordingly.

If you want to claim the tax relief on salary arrears or advance salary, you must file Form 10E before filing your Income Tax Return (ITR). Failure to file Form 10E can lead to the rejection of the tax relief claim under Section 89(1).

Steps to File Form 10E

Step 1: Collect the Necessary Documents

Before filling out Form 10E, you will need the following:

Salary slips or Form 16 to show the salary arrears or advance salary received.
Details of the tax paid on this income.
Breakup of salary payments (how much was paid for each year).

Step 2: Log in to the Income Tax E-Filing Portal

Visit the Income Tax e-Filing Portal: https://incometaxindiaefiling.gov.in/.
Log in using your User ID (PAN), Password, and Date of Birth.

Step 3: Navigate to Form 10E

After logging in, go to the ‘e-File’ tab.
Click on ‘Income Tax Forms’ and select Form 10E from the list.

Step 4: Fill in the Details in Form 10E

Form 10E requires the following information:

Basic Details: Your PAN, name, address, and contact details.
Income Details: Information about the salary arrears or advance salary received.
Breakdown of Income: You will need to provide a detailed breakdown of salary arrears/advance salary received in each year and the tax that would have been applicable had the income been spread across those years.
Tax Calculation: The form will automatically calculate the relief available based on your inputs.

Step 5: Submit Form 10E

After filling in all the details, click on ‘Submit’ to file the form.
Ensure that the details entered are accurate to avoid any complications during assessment.

Step 6: E-Verify Your Form

After successful submission of Form 10E, e-verify the form using your Aadhaar OTP or Net Banking credentials.
Once the form is verified, you will be able to proceed with filing your Income Tax Return (ITR).

Relief Available Under Section 89(1)

The tax relief under Section 89(1) is calculated in the following way:

Step 1: Determine your tax liability on the total income (including arrears or advance salary) in the year of receipt.
Step 2: Recalculate the tax liability by spreading the additional income (arrears/advance salary) across the previous years (as if the salary was paid in those years).
Step 3: The difference in tax payable in the current year and the recalculated tax in the earlier years is the relief under Section 89(1).

Example of Tax Relief Calculation

Suppose in FY 2022-23, you receive ₹1,50,000 as salary arrears for the FY 2020-21 and ₹1,00,000 for the FY 2021-22.

Step 1: Calculate tax for FY 2022-23 considering the full income (₹2,50,000).
Step 2: Recalculate the tax as if the arrears were received in the respective years (FY 2020-21 and FY 2021-22).
Step 3: The difference between the tax paid in FY 2022-23 and the tax calculated for the earlier years is the tax relief you are eligible for.

Common Mistakes to Avoid

Not Filing Form 10E: If you forget to file Form 10E, you won’t be able to claim relief under Section 89(1), and you may end up paying excess tax.
Incorrect Calculation: Incorrectly spreading your arrears or advance salary over the wrong years can lead to errors in tax relief claims.
Filing After ITR: File Form 10E before you file your Income Tax Return (ITR), as the form is necessary for claiming tax relief.

Conclusion

Filing Form 10E is an essential step for taxpayers who receive salary arrears or advance salary and wish to claim the relief under Section 89(1) of the Income Tax Act. By correctly filling out Form 10E, you can reduce your tax liability and avoid paying excess taxes due to the spike in income.

Always ensure that you file Form 10E on time and accurately calculate the relief. If you’re unsure about the process, it’s a good idea to consult a tax professional who can help ensure the proper filing of the form and maximize your tax savings.

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