Section 89 of Income Tax Act

Section 89 of the Income Tax Act, 1961 offers tax relief when salary arrears, advance salary, or lump-sum payments (like gratuity or retrenchment compensation) are received in a single year, preventing higher tax slab implications. For example, if Rs. 5 lakh arrears are taxed in one year, Section 89 allows recalculation by spreading it over past years, potentially saving 20-30% in tax. Over 12 lakh taxpayers filed Form 10E in FY 2022-23 to claim this relief. Mandatory for amounts above Rs. 50,000, this provision ensures fair taxation on delayed payments.
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01 July 2025

Navigating the intricacies of the Indian Income Tax Act can be challenging, especially when dealing with salary arrears, advance payments, or family pension. Fortunately, Section 89 of Income Tax Act provides relief to taxpayers who might face a higher tax burden due to receiving such payments in a lump sum. This section aims to mitigate the extra tax liability that can arise when income pertaining to multiple years is paid in one financial year.

What is Section 89 of Income Tax Act?

Section 89 of Income Tax Act is designed to provide tax relief when a taxpayer receives salary in arrears or advance, family pension, or any other income that spreads over more than one year. This relief ensures that taxpayers are not unduly penalised for receiving large sums in a single financial year, which could push them into higher tax brackets and increase their tax liability disproportionately.

How does Section 89 work?

When you receive a salary payment late (called arrears) or in advance, your total income for the year rises suddenly. This increase may push you into a higher tax bracket, meaning you might have to pay more income tax. Section 89 is a helpful provision that allows you to lower this burden by ensuring fair treatment of such irregular income.

Instead of paying tax as though the entire amount belongs to the year it was received, Section 89 lets you spread out the income across the years it actually relates to. This recalculation helps you avoid paying higher tax unnecessarily.

To benefit from Section 89 relief:

  • You must include full details of tax calculation when filing your income tax return for the year in which arrears or advance salary was received.

  • You must file Form 10E online on the Income Tax Department’s e-filing portal before submitting your return.

Step-by-step process:

  1. Calculate total tax for the year you received the arrears or advance.

  2. Recalculate tax as if the arrears were received in the original year(s) they belong to.

  3. Compare both tax amounts. The difference between them is the tax relief under Section 89.

Examples where this is useful:

  • If arrears cause your income to fall under a higher slab rate, this relief helps redistribute the income appropriately.

  • If tax rates in earlier years were lower, Section 89 ensures your tax is calculated using those older rates, preventing overpayment.

In essence, Section 89 helps smooth out your tax burden by treating the irregular income in a fair, time-appropriate manner.

Eligibility criteria for claiming relief

You can claim relief under Section 89 of the Income Tax Act if certain conditions are met:

  • Resident Indian: You must be an Indian resident during the assessment year concerned.

  • Recognised Retirement Account: If claiming for retirement income, the account must be in a country that India recognises for this purpose.

  • Residency at Time of Account Creation: You should have been a Non-Resident Indian (NRI) living in the country where the account was opened.

  • Foreign Taxation: The retirement income should be taxed by the foreign country when withdrawn, not when earned.

These conditions are meant to ensure only legitimate arrears or deferred earnings are granted relief under this section.

Relief under Section 89(1)

Tax is typically calculated on the income you earn or receive in a financial year. However, if your income includes past payments made in the current year, such as arrears, your tax liability might increase. This is because the delayed payment may push your income into a higher tax bracket.

To help reduce this unexpected tax burden, Section 89(1) of the Income Tax Act offers relief. This means you won’t pay extra tax just because a payment was delayed.

Relief under this section can be claimed for the following:

  • Arrears or advance salary

  • Premature withdrawal from Provident Fund

  • Gratuity

  • Commuted pension value

  • Arrears of family pension

  • Compensation due to job loss or early retirement

The relief works by recalculating your tax as though the income had been received in the original year it was due. The tax difference between the year it was received and the years it should have been paid gives you the benefit.

To claim this relief, you must submit Form 10E before filing your income tax return.

How to calculate tax relief under Section 89(1) on salary arrears?

You can calculate your own tax relief under Section 89(1) by following this step-by-step process:

  • Step 1: Work out the total tax payable in the year you received the arrears, including the arrear amount. You can find this in Part B of your Form 16.

  • Step 2: Calculate your tax without the arrears for the same year. Use your Form 16 and employer’s arrears document to find the amount.

  • Step 3: Subtract the Step 2 amount from the Step 1 amount. This gives the extra tax caused by the arrears.

  • Step 4: Calculate the tax you would have paid in the original year (e.g., 2021–22), excluding the arrears.

  • Step 5: Now calculate the tax in that original year including the arrears.

  • Step 6: Subtract the amount in Step 4 from Step 5. This shows the extra tax if arrears had been received in the correct year.

  • Step 7: If the amount in Step 3 is greater than the amount in Step 6, the difference is your eligible relief under Section 89(1). If not, no relief is available.

You can also use the Income Tax Department’s website to calculate this relief online. Once you’ve calculated it, you can file your return on ClearTax or any other authorised platform.

The example below shows how a person ‘A’ saved tax under Section 89 by spreading out her arrears across financial years.

Particulars

Tax liability for FY 2022-23

Tax liability for FY 2021-22

Salary inclusive of arrears

Salary without arrears

Salary inclusive of arrears

Salary without arrears

Step 1

Step 2

Step 3

Step 4

Total income

18,00,000

15,00,000

9,00,000

6,00,000

Income tax

3,52,500

2,62,500

92,500

32,500

Cess

14,100

10,500

3,700

1,300

Total tax liability

3,66,600

2,73,000

96,200

33,800

Step- 3 (X) Tax at Step (1) – Tax at Step (2)

93,600

-

Step- 6 (Y) Tax at Step (4) – Tax at Step (5)

-

62,400

Relief u/s 89: Step 3 – Step 6

31,200

Tax payable: Tax at (1) – Relief

3,35,400

Relief under section 89 = (X) - (Y) = 93600 - 62400= 31200.

Similarly, tax liability for FY 2023-24:

1

Total income (excluding arrear)

15,00,000

2

Salary received as arrear (arrear received for FY 22-23)

3,00,000

3

Total income including arrear

18,00,000

4

Tax on total income as per item 3

3,66,600

5

Tax on total income as per item 1

2,73,000

6

Tax on salary received in arrears (difference of 4 and 5)

93,600

7

relief u/s 89 - step 8- step 6

31,200

 

Tax payable after relief

3,35,400

 

 

Tax liability for FY 22-23 without arrear

Tax liability for FY 22-23 with arrear

Total income

6,00,000

9,00,000

Total income

33,800

96,200

Difference

62,400

 

Year of arrears vs. Year of receipt:

Section 89 relief is available when salary or pension arrears are paid in a year different from the one they were due. This situation can lead to higher tax liability for the year of receipt. Section 89 lets taxpayers recalculate the tax as if the income was received in the original year, making the tax burden fairer. This is particularly helpful when the earlier year had lower tax rates or when the arrears push the person into a higher tax slab in the current year.

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What is filing Form 10E?

Filing Form 10E is compulsory if you want to claim relief under Section 89(1). Without it, your return may be processed without the relief, increasing your tax payable.

You can fill this form online through the income tax portal at www.incometax.gov.in. Once logged in, locate Form 10E under the “File Income Tax Forms” section.

It’s important to submit Form 10E before filing your income tax return to avoid receiving a notice from the Income Tax Department. You do not need to attach this form with your ITR, but keep a record of it.

How to file Form 10E

To file Form 10E online, follow these steps:

  • Step 1: Visit www.incometax.gov.in and log in using your PAN as the User ID and your password.

  • Step 2: Go to e-File > Income Tax Forms > File Income Tax Forms.

  • Step 3: Under ‘Persons not having business/professional income,’ select Form 10E.

  • Step 4: Choose the relevant assessment year and click ‘Continue’.

  • Step 5: Click ‘Let’s Get Started’ to begin.

  • Step 6: Tick the income items relevant to you and click ‘Continue’.

  • Step 7: Enter the details for each section by clicking the links provided.

  • Step 8: Once complete, click ‘Preview’.

  • Step 9: Finally, e-verify your submission.

After successful submission, you will receive a Transaction ID and Acknowledgement Number, confirming that Form 10E has been filed.

This process is essential to avoid delays or rejection of relief claimed under Section 89.

Documentation required for Form 10E:

Before filing Form 10E, keep the following documents ready:

  • Salary slips or employer’s statement showing the breakup of arrears

  • Form 16 for the year in which arrears were paid

  • ITR copies from earlier years (if available)

  • Details of income and tax paid in the year(s) the arrears pertain to

  • Any other supporting documentation for changes in salary or pension

  •  

Common mistakes to avoid while filing Form 10E:

While claiming relief under Section 89, taxpayers often make a few avoidable mistakes:

  • Submitting Form 10E after filing the income tax return, which may lead to the relief being disallowed.

  • Entering incorrect details of arrears, including wrong amounts or financial years.

  • Failing to maintain proof of income received in arrears or advance (such as salary slips or employer statements).

  • Not choosing the correct assessment year related to the arrears received.

Income tax notice for non-filing of Form 10E

If you claim relief under Section 89(1) but do not submit Form 10E, the Income Tax Department may issue a notice of non-compliance. This notice is sent when the system detects that tax relief was claimed, but no Form 10E was found.

Form 10E ensures that the department has all required details for calculating the correct tax relief. It applies in cases where arrears, advance salary, or similar delayed payments are involved.

When the department notices the absence of Form 10E, it sends a communication requesting that you submit the form at the earliest. The notice usually provides reasons for the issue and may include a compliance deadline along with instructions on how to file the form.

Failure to submit Form 10E within the given time may result in the rejection of your claim for relief. Even though your ITR might be filed, the relief under Section 89 will not be processed. Therefore, it is strongly recommended to submit the form before filing your income tax return and to retain a copy for your records.

  1. Five things to remember when claiming relief on arrears
  2. Form 10E must be filed online: If you claim relief but skip Form 10E, your return won’t be processed, and you may receive a notice. Filing this form is mandatory.
  3. Salary arrears are taxed when received: Even though salaries are usually taxed when due or received, arrears often relate to past years and are taxed in the year received. That’s why Section 89 relief is essential.
  4. Select the correct assessment year: Always choose the year in which the arrears were received. For instance, arrears received in FY 2023–24 relate to AY 2024–25.
  5. No need to attach Form 10E to your return: You’re not required to upload or attach the form to your ITR. However, ensure it’s submitted online and retain all relevant documents.
  6. Employer confirmation is not mandatory: While your employer might ask for a submission confirmation, there’s no rule requiring you to give them a copy of Form 10E.

Key highlights of Section 89 of Income Tax Act

 

  1. Relief on salary arrears and advance: If you receive salary arrears or advance payments, Section 89 of Income Tax Act allows you to claim relief to avoid the burden of paying higher taxes due to the lump sum payment.
  2. Family pension: This section also covers family pension, ensuring that beneficiaries are not penalised with higher taxes due to delayed or lump sum receipts of pension payments.
  3. Calculation of relief: The relief under Section 89 is calculated using Form 10E, which requires details of the arrears received and the corresponding income for the relevant years.
  4. Spreading income: The income is spread over the years it pertains to, and tax is calculated as if the income was received in those years, providing a fairer tax liability.

Benefits of Section 89 of Income Tax Act

  1. Reduced tax liability: The primary benefit of Section 89 of Income Tax Act is the reduction in tax liability. By spreading the income over the relevant years, taxpayers can avoid the impact of higher tax brackets due to lump sum payments, ensuring a fairer distribution of tax burden.

  2. Fair treatment of income: This section ensures fair treatment of income that spans multiple years. Taxpayers are not penalized for delays or timing issues in receiving their income, providing a more equitable tax treatment.

  3. Financial planning: Understanding Section 89 of Income Tax Act can aid in better financial planning. Taxpayers can anticipate the relief available and manage their finances more effectively, especially when dealing with salary arrears, advance payments, or pension receipts.

Practical scenarios for Section 89 of Income Tax Act

  1. Salary arrears: Imagine a scenario where you receive salary arrears due to a delay in increment or promotion. The lump sum payment received in the current year might push you into a higher tax bracket, increasing your tax liability. Section 89 of Income Tax Act allows you to spread this income over the relevant years, reducing the tax impact.

  2. Advance salary: If you receive advance salary, such as a bonus or advance payment for future services, this section helps in distributing the tax liability over the years the income pertains to, ensuring you don't pay excessive taxes in the current year.

  3. Family pension: Beneficiaries receiving family pension in arrears can also benefit from Section 89 of Income Tax Act. The relief provided ensures that the lump sum payment does not result in a higher tax burden.

Other investment options to consider

  1. Tax-saving fixed deposits: Tax-saving fixed deposits offer a dual benefit of assured returns and tax deductions. These deposits have a lock-in period of five years and qualify for deductions under Section 80C of the Income Tax Act, providing an effective way to save taxes while earning interest.

  2. Public Provident Fund (PPF): PPF is a popular tax-saving instrument offering deductions under Section 80C. It provides tax-free interest and long-term benefits, making it an excellent option for retirement planning and tax saving.

  3. Equity-linked Savings Scheme (ELSS): ELSS funds offer tax benefits under Section 80C and have the potential for high returns due to their equity exposure. These funds come with a lock-in period of three years and are suitable for investors looking for tax-saving options with growth potential.

  4. Home Loan: Taking a home loan not only helps in acquiring your dream home but also provides significant tax benefits. Under Section 24(b) of Income Tax Act, you can claim deductions on the interest paid on a home loan, reducing your overall tax liability. Additionally, principal repayment qualifies for deductions under Section 80C.

When planning your home purchase alongside tax-saving strategies, securing the right home loan with competitive rates can maximise your overall financial benefits. Bajaj Finserv offers attractive interest rates starting from 7.49%* p.a with flexible repayment options. Check your eligibility today. You may already be eligible, find out by entering your mobile number and OTP.

 

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Claiming relief under Section 89 of Income Tax Act

Claiming relief under Section 89 of Income Tax Act involves a systematic approach:

  1. Gather information: Collect details of the arrears or advance payments received and the corresponding income for the relevant years.

  2. Calculate relief: Use Form 10E to calculate the relief by comparing the tax liabilities of the current and previous years.

  3. File Form 10E: Submit Form 10E along with your income tax return to claim the relief. This form is mandatory for processing your relief claim.

  4. Review and submit: Ensure all details are accurate and submit the form with your income tax return for the relevant financial year.

As you optimise your tax planning with Section 89 relief, consider how homeownership can further enhance your financial strategy. Property investment not only provides tax benefits but also builds long-term wealth. With a home loan from Bajaj Finserv, you can access loans up to Rs. 15 Crore* at competitive rates starting from 7.49%* p.a Check your loan offers and take the first step towards your dream home. You may already be eligible, find out by entering your mobile number and OTP.

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Frequently asked questions

What is Form 10E?

Form 10E is an online form that must be filed if you are claiming tax relief under Section 89(1) for arrears or advance salary. From FY 2014–15 onwards, the Income Tax Department made it mandatory. Without this form, your return may be processed without granting the relief.

Where can I file Form 10E?

You can file Form 10E on the official Income Tax e-filing portal. Once logged in, go to the e-File section, choose ‘Income Tax Forms’, then select Form 10E from the list and complete the submission online.

Which assessment year should I choose while filing Form 10E?

You must select the assessment year in which you received the arrears. For example, if you received salary arrears in FY 2023–24, you should choose AY 2024–25 while filing Form 10E.

Do I need to submit Form 10E before or after filing my tax return?

Form 10E must be filed before submitting your income tax return. If you claim relief without filing Form 10E, your claim might be rejected and you could receive a notice from the department.

Do I need to attach a copy of Form 10E with my return?

No, you do not need to attach Form 10E with your ITR. Income tax returns are annexure-less. However, filing the form online is necessary, and you must retain a copy for your own records.

Do I need to give Form 10E to my employer?

It’s not mandatory to provide Form 10E to your employer. They might ask for confirmation of submission before adjusting your TDS, but there’s no legal requirement to share it with them.

How is income tax on salary calculated?

Income tax in India is based on slab rates. Individuals are taxed at 5% for Rs. 2.5–5 lakh, 20% for Rs. 5–10 lakh, and 30% above Rs. 10 lakh. From FY 2020–21, a new tax regime was introduced with lower rates but fewer deductions. You can compare both regimes using a tax calculator.

I received arrears for FY 2021–22 in FY 2023–24. Will I have to pay extra tax?

If you’ve received arrears related to earlier years, Section 89(1) allows you to claim relief so you don’t pay excessive tax. You’ll need to calculate relief and file Form 10E to benefit.

How much tax relief can I get under Section 89(1)?

The relief equals the extra tax caused in the current year by arrears, minus the tax that would’ve applied if the arrears were received in the correct past year. This way, tax is calculated fairly.

Understanding tax relief mechanisms like Section 89 helps in better financial planning, especially when considering major investments like buying a home. Home loans provide significant tax benefits under Section 24(b) for interest payments and Section 80C for principal repayments. Check your eligibility for a Bajaj Housing Finance Home Loan. You may already be eligible, find out by entering your mobile number and OTP.

Is Section 89 relief available for VRS compensation?

Yes, Section 89 relief can be claimed for VRS (Voluntary Retirement Scheme) compensation unless you've already claimed exemption under Section 10(10C). You cannot claim both for the same income.

Can I claim relief for arrears if my ITR for the past year is already filed?

Yes, you can claim relief under Section 89 even if earlier returns are filed. The key requirement is to file Form 10E and provide correct arrear details during the current year’s return.

What are ways to save tax on salary arrears?

You can save tax on arrears by claiming relief under Section 89(1). This allows your arrears to be taxed as if they were earned in past years, avoiding excessive tax in the year of receipt.

Beyond claiming relief on arrears, consider how homeownership can provide ongoing tax benefits. A home loan from Bajaj Finserv not only helps you acquire your dream property but also offers substantial tax deductions on both interest and principal payments. Check your loan offers for competitive rates and flexible repayment options. You may already be eligible, find out by entering your mobile number and OTP.

Can I claim relief for arrears not shown in Form 16 but added to current year income?

Yes, even if the arrears are not separately mentioned in Form 16, you can still claim relief by calculating the amount and filling in the necessary details when filing your return.

Is it compulsory to file the previous year’s ITR to claim Section 89 relief?

No, you don’t need to file previous years' ITRs to claim relief. But you must know your income and tax details from the earlier years to calculate and justify the relief.

Do I need to file an ITR to claim Section 89 relief?

Yes, to get relief under Section 89(1), you must file both your income tax return and Form 10E. Both are necessary for the tax department to process your claim.

What is the rebate under Section 87A mentioned in salary slips?

Rebate under Section 87A is for resident individuals with income up to Rs. 5 lakh (Rs. 7 lakh in the new regime from FY 2023–24). It reduces your tax liability by up to Rs. 12,500 or Rs. 25,000 based on applicable limits.

Can I claim HRA arrears under Section 89?

Yes, House Rent Allowance (HRA) is part of salary. If you receive HRA arrears, you can claim tax relief under Section 89 for that amount as long as you meet the other requirements.

I received arrears of family pension for the past three years. How do I get tax relief?

You should file Form 10E and enter the details of the family pension arrears. Section 89 applies to pension-related arrears as well, and this allows you to claim a deduction for the delayed payment.

Can I claim relief for advance salary under Section 89?

Yes, if you’ve received a portion of your salary in advance and it causes a spike in your tax liability, Section 89 can help. You’ll need to calculate relief using the steps outlined earlier and file Form 10E.

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