Relief for taxpayers who have received their salary in advance and arrears of salary

Last Updated On: Sept. 30, 2020, 7:59 a.m.
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INCOME TAX RELIEF FOR SALARY RECEIVED IN ADVANCE AND FOR ARREARS OF SALARY

 

Any Income due or received by an employee from his employer or former employee is taxable under the Income Tax head “Salary” as per the provisions of the Income Tax Act,1961.

There are certain situations when an employee may receive income in advance in a particular financial year, which relates to earlier financial years i.e advance received or arrears of salary.

In such above-mentioned cases, there is a relief provided under the Income Tax Act.

Arrears of Salary/Advance Salary received:

In any financial year, if a taxpayer receives a sum in the form of salary which is being paid in arrears or received in advance for more than 12 months or receives profits instead of salary or family pension paid in arrears due to which is total income is taxable at a higher rate then the taxpayer who is facing such situation can claim relief in respect of such higher rates.

Other receipts which are eligible to claim this relief are:

  • Gratuity received for past services
  • Payment received in the commutation of pension
  • Compensation received from the employer or former employer.

The relief has to be claimed in the financial year in which the extra payment of advance salary received or arrears of salary is taxed.

The relief under these provisions involves finding out two rates of taxes. The first is the rate of tax applicable to the total income including the extra amount in the year of receipt. Second is finding out the rate by adding the arrears to the total income of the year to which they relate. These all relief is claimed under section 89 of Income Tax Act, 1961.

 

How to Calculate relief under section 89?

1. Calculate tax payable on the total income, including arrears in the year it is received

2. Calculate tax payable on the total income, excluding arrears  in the year it is received

3. Calculate the 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 the difference between Step 4 and Step 5

7. Excess of the amount at Step 3 over Step 6 is the tax relief that shall be allowed.

If the amount of step 3 is greater than step 6, then no relief can be claimed.

 

Furnishing of Particulars for claiming relief:

  • In a specified form, the taxpayer is required to furnish the particulars to claim the relief.
  • This is a beneficial provision in case of payments received by an employee from his employer/former employer for more than one financial year especially when due to these additions, the taxpayer’s slab rate moves upward or when there is a variation in tax rates in different financial years.
  • Therefore, when salary/other specified payments are received in arrears or in advance, the benefit could be availed of by the taxpayer by paying due attention to the relief provisions as specified above.

 

Exceptions:

When the taxpayer has also claimed benefit/exemption under some other provision under the Act. It has now been specified that no such relief can be availed in respect of the amount received by the taxpayer on his voluntary retirement or termination of service if an exemption in respect of the same has been claimed otherwise by the taxpayer under some other provision.

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