Check how income tax relief works under section 89 of salary arrears

By Nitesh Buddhadev

There are times when employees receive a lump sum for certain benefits that accrued in previous years. For example, previous pay increases result in arrears of salary, gratuity which is a single amount received at the end of the tenure but it is related to a few years of service of the company, leave cash during tenure which is accepted as lumpsum but related to accumulated leaves in previous years.

In all the cases mentioned there is an additional tax burden on the employee due to the amount received in the current year for the benefit accumulated in previous years. In such cases, relief is provided under section 89 of the Income-tax Act to reduce the additional tax burden.

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For example, Anuradha works for ABC. His monthly salary is Rs. 90,000 companies credit 35 days per year as ABC holidays. In March 2022, he cashed 50 pages (from FY 2015-16: 25 pages and 2016-17: 25 pages) and received Rs. 1,50,000 Any leave paid during the service is fully taxable and is part of ‘Income from Salary’. This receipt of holiday cashing will result in additional tax burden. So in such cases relief is provided under section 89.

Fiscal year 2021-22
Tax on salary without leave cashing Tax on salary including leave cashing
Salary 10,80,000 12,30,000
Std deduction 50,000 50,000
10,30,000 11,80,000
Exemption under 80C 1,50,000 1,50,000
Net taxable salary 6,70,000 10,30,000
Tax liability 92,040 121,500
Additional tax liability due to holiday cashing 121,500

Step 2: Calculate the tax payable for each previous year including the amount deducted and the income arrears.

FY 2015-16 FY 2016-17
Tax on salary without leave cashing Tax on salary including leave cashing Tax on salary without leave cashing Tax on salary including leave cashing
Salary 4,25,000 4,25,000 4,75,000 4,75,000
Leave the monetization Zero 75,000 Zero 75,000
4,25,000 500,000 4,50,000 5,50,000
Exemption under 80C Zero Zero 1,50,000 1,50,000
Net taxable salary 4,25,000 500,000 3,00,000 4,00,000
Tax liability 15,965 23,690 2,575 10,300
Holiday cashing tax payable 7,725
[23,690-15,965]
7,725[10,300-2,575]

Step 3: Calculation of income tax relief under section 89

Additional tax liability due to holiday cashing in 2021-22 FY 29,460
Less: Taxes payable on holiday cashing in their respective years [FY 2015-16 Rs. 7,725 + FY 2016-17 Rs. 7,725] (15,450)
Relief u / s 89 14,010

This relief can be claimed under Section 89 by filing Form 10E with the Income Tax Authority.

(Author CA and founder of Nimit Consultancy)

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