Section 89(1) relief on salary arrears: calculation and Form 10E

Salary is taxed on a due-or-receipt basis, whichever is earlier. When arrears for past years – after a pay revision, court order or delayed increment – are received in the current year, they are taxed now. Because slab rates are progressive, the tax on that lump sum may be far higher than if it had been paid on time. Section 89(1) of the 1961 Act gives relief for this extra tax. A corresponding relief continues under the Income-tax Act, 2025.

When relief is available

• Arrears of salary or pension received in the current year relating to earlier years.
• Advance salary relating to future years.
• Gratuity (in specified cases), compensation on termination, commutation of pension – under specific rules.

The calculation in five steps

1. Current year, with arrears: compute tax on total income including arrears.
2. Current year, without arrears: compute tax on total income excluding arrears.
3. Difference A = Step 1 – Step 2 (extra tax this year because of arrears).
4. Earlier year(s): for each year to which arrears relate, compute tax on that year's income with and without the arrears for that year. Difference B = sum of these differences.
5. Relief = A – B, if positive. If B is more than A, no relief (and no extra tax).

Use the rates of each respective year.

Worked example

Example: Mr Yadav, a government employee in Shalimar Bagh, receives arrears of ₹3,00,000 in FY 2025-26: ₹1,50,000 relating to FY 2023-24 and ₹1,50,000 relating to FY 2024-25. His regular income for FY 2025-26 is ₹12,00,000 (after standard deduction) under the new regime. His taxable income was ₹6,00,000 in FY 2023-24 and ₹7,00,000 in FY 2024-25, both in the new regime of those years.

Step 1–3: current year (FY 2025-26, new regime)

With arrears: ₹20,000 + ₹40,000 + 15% of ₹3,00,000 (₹45,000) = ₹1,05,000 + cess ₹4,200 = ₹1,09,200.

Step 4: earlier years (new regime as it stood then)

FY 2023-24 slabs: 0–3 lakh nil, 3–6 lakh 5%, 6–9 lakh 10%; FY 2024-25 slabs: 0–3 lakh nil, 3–7 lakh 5%, 7–10 lakh 10%. In both years the rebate made income up to ₹7 lakh tax-free.

Step 5: relief = A – B = ₹1,09,200 – ₹67,600 = ₹41,600.

Mr Yadav pays ₹67,600 instead of ₹1,09,200 on his arrears – the tax he would have paid had he received the money on time.

Filing Form 10E

• Log in to the e-filing portal → e-File → Income Tax Forms → Form 10E.
• Enter details of arrears year-wise, with income and tax of each earlier year.
• Submit before filing the ITR claiming relief; the acknowledgement is linked to your return.
• Your employer may allow relief in TDS only if you furnish the details; otherwise claim in the return.

Practical points

• Keep copies of returns of earlier years to get exact income figures.
• If the earlier year's return was not filed, compute income from salary certificates.
• Relief cannot create a refund of tax paid in the earlier years; it only reduces current-year tax.
• Leave encashment arrears and pension arrears follow the same method.

Common mistakes

• Claiming relief in the ITR without filing Form 10E – this triggers a Section 143(1)(a) adjustment.
• Using current-year slabs for earlier years.
• Ignoring the rebate available in the earlier year, which often makes Difference B very small and relief large.

Key takeaway

Section 89(1) relief ensures arrears are taxed at the rates you would have paid on time. File Form 10E first, then claim the relief in your return. Our ITR filing team prepares Form 10E computations for government and PSU employees and pensioners.