Income tax return: When tax liability increases due to the receipt of arrears or additional payments, it usually occurs because the arrears or additional income is added to the individual’s total income for the current fiscal year. This increased income can push the individual into a higher tax bracket, resulting in a higher tax liability.
These arrears can be in the form of salary, pension, rent or any other income that should have been received in previous years but was deferred or withheld. When these arrears are finally paid to the person, they are considered taxable income for the year in which they are received.
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For example, if an employee earns back wages in 2022, but the backlog relates to 2021, the employee may have to pay a higher tax rate on the backlog in 2022.
In such cases, if a taxpayer’s tax liability increases as a result of arrears, he may be entitled to an exemption under section 89(1) of the Income Tax Act, 1961. This reduction may help reduce the amount of tax the taxpayer has to pay. pay.
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Section 89(1) of the Income Tax Act, 1961
Section 89(1) of the Income Tax Act, 1961 provides for an exemption from tax on back pay. This allowance is available to employees who have a salary arrears in a financial year, but the salary arrears relate to a previous financial year.
In this section, individuals can claim reduction and reduction of their tax liability by calculating tax on the total income of the year in which the arrears or additional payments were received, together with the reduction for the previous years in which the income would have been originally taxed .
The amount of the exemption available under Article 89(1) is calculated as follows:
- The tax due for the year in which the arrears are received is calculated.
- The tax due for the year to which the arrears relate is calculated as if the arrears had been received in that year.
- The difference between the two tax liabilities is the amount of the available exemption.
ITR declaration: How to claim exemption under Article 89(1)?
To claim an exemption under Section 89(1), the employee must submit Form 10E.
The purpose of Article 89(1) is to prevent unnecessary hardship caused by an increase in tax liability due to the accumulation of income in a given year.
By making use of the deduction under this section, individuals can ensure that they are taxed at the average rate applicable to their income, spread over the relevant years.
It is important to note that the exemption under Article 89(1) only applies to salary and pension income and not to income from business or profession.
Form 10E: All questions answered
What is Form 10E?
In the event of overdue receipt or advance payment of any amount in the form of salary, an exemption may be claimed under Article 89. In order to claim such an exemption, the assessee must submit Form 10E. The form must be filed before the income tax return is filed.
Do you need to download and submit Form 10E?
No, it is not necessary to download Form 10E as the submission can be made online after logging into the e-Filing portal (https://www.incometax.gov.in/iec/foportal/).
When should you file Form 10E?
Form 10E must be filed before filing your income tax return.
Is Form 10E required to file?
Yes, it is mandatory to file Form 10E if you want to claim tax relief on your arrears/advance income.
What happens if you do not file form 10E but apply for exemption under Section 89 in ITR?
If you do not complete Form 10E but claim u/s 89 in your ITR, your ITR will be processed but the claimed u/s 89 waiver will not be granted.
How do you know that the IT department has rejected the exemption I claimed in my ITR?
In the event that the u/s 89 waiver claimed by you is not granted, the same will be notified by the ITD via notice u/s 143(1) after the processing of your ITR has been completed.
