Calculate Tax on Arrears in 7 Easy Steps

Calculate Tax on Arrears

Calculate Tax on Arrears

This year might have been happy one for you if you received long pending salary dues as arrears. But we know receiving arrears makes everyone happy but pain of paying higher taxes makes them worried? We explain how to calculate tax on arrears and claim tax benefit u/s 89(1) in income tax return with example.

Tax Calculation on Arrears:

We take a simple example. Amit is a government employee and he has received his long awaited salary dues as arrears. Here are the numbers.

  • Salary income for FY 2015-16: Rs 9,00,000
  • Additional Arrears received: Rs 5,00,000
  • Total income: 14,00,000

This arrears was due from last 3 financial years as follows:

  1. FY 2014-15: Rs 2,00,000
  2. FY 2013-14: Rs 1,75,000
  3. FY 2012-13: Rs 1,25,000

We use this example to illustrate tax calculation on arrears. For simplicity we would assume that Amit has not invested for any tax exemption, so his income stated above is “Net Taxable Income”.

Download:The ultimate ebook guide to Save Tax for FY 2017-18

Step 1:

Calculate tax for present year without considering arrears

So for FY 2015-16, the taxable income without arrears = Rs 9,00,000

Income Tax Payable = Rs 1,08,150

Step 2:

Calculate tax for present year after adding arrears payout

So for FY 2015-16, the taxable income without arrears = Rs 9,00,000 + Rs 4,00,000 = Rs 14,00,000

Income Tax Payable = Rs 2,52,350

Step 3:

Subtract income tax payable you get in step 2 from step 1

Additional tax due to arrears: Rs 2,52,350 – 1,08,150 = Rs 1,44,200

Also Read:  Best Tax Saving Investments u/s 80C

Step 4:

Allocate the arrears components to the respective financial years. So in our case it’s as follows

FY 2014-15: Rs 2,00,000

FY 2013-14: Rs 1,75,000

FY 2012-13: Rs 1,25,000

Step 5:

Calculate new tax payable for each financial year where the component of arrears is present i.e. adding arrears to the old income in respective financial years.

Calculating Tax on Arrears

Calculating Tax on Arrears

Add the excess tax payable across the financial years due to arrears. In our case it comes out to be Rs 1,03,000. This means that had the salary payout been on time you would have paid this amount as tax.

Step 6:

Subtract the excess tax payable due to arrears in Step 3 from the additional tax payable in Step 5.

Tax Difference: Rs 1,44,200 – Rs 1,03,000 = Rs 41,200.

If you consider arrears payment as income for only present financial year, you would be paying Rs 41,200 extra as taxes, without any fault of yours. Government thankfully understands the situation and has provided relief for tax payers under Section 89(1).

Also Read: Submit Income Tax Proof to Employer – How, When and Why?

Step 7:

Calculate your final tax liability for FY 2015-16

So for FY 2015-16, the taxable income with arrears = Rs 9,00,000 + Rs 4,00,000 = Rs 14,00,000

Income Tax Payable = Rs 2,52,350

Tax Deduction u/s 89(1) on account of arrears = Rs 41,200

Net Tax payable = Rs 2,52,350 – 41,200 = Rs 211,150

To claim the above tax benefit u/s 89(1), you need to fill up Form 10E. From FY 2014-15 (assessment year 2015-16), the income tax department has made it mandatory to file Form 10E if you want to claim relief under section 89(1). The form can be filled online on the Income Tax Website.

The question is what would have happened if there was no excess or lower tax as in Step 6?

There would be no special treatment. You just calculate your tax after adding arrears and pay our taxes. Section 89(1) would not be applicable!

Also Read: 13 Investments to Generate Regular Income

Form 10E: How to fill?

The Form 10E can be filled online from Income Tax website. Here are the steps:

  1. Login to Income Tax efiling website.
  2. After you have logged in, click on tab named ‘e-File’ and select ‘Prepare & Submit Online Form (Other than ITR)
  3. On the next screen, select Form 10E and the Assessment Year from the drop down.
  4. The Form 10E would be displayed with instructions and annexure. Fill the relevant details and submit.

In case you do not submit Form 10E to take advantage of Sec 89(1), you might receive notice from income tax department saying: The relief u/s 89 has not been allowed in your case, as the online form 10E has not been filed by you. The furnishing of Online form 10E is required as per sec.89 of the Income Tax Act

Tax Calculators:

You can download the income tax calculator for past financial years here. Use them to calculate your taxes for the respective years.

22 thoughts on “Calculate Tax on Arrears in 7 Easy Steps

  1. I RECEIVED PAY ARREARS FOR LAST FIVE YEARS. FOR FIRST YEAR IT WAS A NEGATIVE FIGURE AND POSITIVE FOR NEXT FOUR YEARS. HOW TO SHOW NEGATIVE PAY ARREARS FOR FIRST YEAR FOR CALCULATING RELIEF U/S 89.

  2. Mera ek or question he. Meri mother ki bank me kuch FD he, unhone bank me PAN details di thi but staff ne update nahi kia to unka 20% ke hisab se TDS deduct ho gaya. Form 26AS me TDS show nahi karega . Par me bank me ja kar TDS certificate or Interese certificate le aaya hu. Kya ham refund clami kar sakte he. Please help us.
    Thanks in Advance.

    • Yes get PAN updated and file income tax return to get tax refund. Also if TDS is deducted it should reflect in Form 26AS (if its for last financial year). For this financial year TDS might take time to reflect in Form 126AS.

      • Bank manager denied updating TDS with PAN. He has issued a TDS certificate only. Please guide me in this situation.

        • I got it. This is because PAN number was not provided and hence 20% TDS would have been deducted. While deducting TDS, PAN was not present hence it might not have reflected in Form 26AS. So you can use the TDS certificate to file tax return.

  3. Hello sir,
    My situation is complex. I am a government employee and my 4-month salary of FY 15-16 was stuck due to departmental reason. I got that salary in FY 16-17 and due to this addition, I paid higher tax in 20% bracket. My CA has filled ITR and Form 10E but I am not satisfied with return filled by him. Actually, he subtracts arriers from total income but at the end, he also deducts ppf amount of that 4 months from the total taxable salary of 16-17. Hope you understand, please help me out.

    • What I understand is you want to show your EPF contribution from arrears in one financial year while taking advantage of arrears on salary. This is a grey area for taxation. Logically your CA seems right because if the salary is treated as arrears so would be any deduction from the same. However you can take full contribution of PF from arrears and show in one present financial year too. Check out more @ the Hindu

  4. I recieved arrears of yrs 11-12, 12-13, 13-14 & 14-15 during the yr 15-16
    I completed form 10E for rebate u/s 89
    A refund of rs 50 was due as on 31-3-2016 wrt Income Tax according to my calculations

    I somehow forgot to file ITR for 15-16 in time
    I efiled it around 20-6-2017.
    Now recieved a intimation regarding IT demand of Rs 1.45 Lakh u/s 143 which their calculation shows it to be Interest u/s 234

    Is section 234 (1,2,3) all three applicable to me?

    Kindly help

  5. Hello Sir I received Arrear IN F.Y2016-17 (A.Y.2017-18) but the Arrear belong to F.Y.2015-16 (A.Y.2016-17) . Now if I fill form 10E online BUT ITR OF F.Y.2015-16 (A.Y.2016-17) NOT FILLED BEFORE.CAN ITS MANDOTORY TO FILL ITR OF F.Y.2015-16 (A.Y.2016-17) FOR ME TO GET TAX RELIEF UNDER 89(1)

    • It’s not mandatory but its always a good thing to do as it keeps everything clean from tax perspective. You still have time to file your last year return. I would recommend to do so and avoid any uncomfortable questions at later stage.
      But even without filing you can take advantage of arrears u/s 89(1)

      • i got job in jan-16 and salary of jan16 to march 16 get as Arrear IN F.Y2016-17 (A.Y.2017-18).i have no other income in F.Y.2015-16 (A.Y.2016-17).so what income show in itr of F.Y.2015-16 (A.Y.2016-17)

        • You joined in January and the salary of all 3 months were credited in next financial year. In case of salary income the tax is to be paid as due and not as received. Arrears generally refers to payment of increased salary only.

          So for you file income tax return of AY 2016-17 taking 3 month salary as income and AY 2017-18 taking full year salary. This would be tax efficient for you and you need not worry about arrears! I guess even your Form 16 should reflect the same.

  6. yogendra singh says:

    Hello Sir I received Arrear F.Y2016-17 (A.Y.2017-18) but the Arrear belong to F.Y.2015-16 (A.Y.2016-17) . Now if I fill form 10E online . which A.Y. is calculated(2016-17 or 2017-18)

  7. Hi Amit,

    While filling Form-10E online, under tab Annexure-1 there is a ‘Table A’.
    I am confused what to fill in first column “Previous Year (s)” ?

  8. I have received arrears this year which pertains to previous 3 years. However this year & as well as previous three years. I have been in the 30% tax bracket.
    So, It does not really matter weather I pay the tax on arrears this year or allocate it to previous years as there will be no savings in my case.
    Pls. confirm my prsumption

  9. Amit Gulati says:

    Nicely explained. Thanks. I have the following questions in this context.

    1. Does the DDO have to upload any Relief figures for the employees u/s 89(1) with the Income Tax Dept ?

    2. Does the DDO mention the relief amount u/s 89(1) in Part B of Form 16?

    3. Which is to be submitted first on Income Tax efiling website, Form 10E or the ITR?

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