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Salaries - Deductions under Section 89

Section 89 of the Income Tax Act 1961.

This particular section provides for relief to the assessee when there is a chance for increased salary in a year due to an arrear payment has happened in the previous years. This means a salary payment which should have been paid in any previous years, which are not paid during that year and is paid during the current previous year. This will definitely increase the salary received during the year which may end up in paying increased income tax.

To save from the additional taxation, section 89 provides for a relief, to ensure that if there is a delay in payment of salary and the assessee were in a lower tax bracket for the year the money is received.

The calculation will be explained in steps.

  1. First calculate the tax payable on the total income, including additional salary, in the years of receipt. Arrears of salary will be reflected in Form 16 Part B.

  2. Now, from the total salary which is computed for the first step, deduct the additional salary received. Calculate the tax payable, this will be tax on that years salary excluding the additional receipt. It is very important to note that the arrear document is to be collected from the employer.

  3. Now deduct the tax calculated under point two from one, which will be the difference tax liability created due to arrears of income.

Now we need to go back to the year to which the arrear relates and do the calculation.

  1. Calculate the tax payable on the total income of the year to which the arrears relates, excluding arrears.

  2. Calculate the tax payable on the total income of the year to which the arrears relates, including arrears.

  3. Now find the difference between tax calculated as per point 5 and point 4.

  4. Now find the difference between tax in point three and six. If the tax at point three is more than six, the different amount will be allowed as relief. If the tax in point six is more than three is above, then no relief will be allowable.

To claim deductions under section 89 , filing form 10E is mandatory.

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