How Income Tax on Salary Arrears Works — and How Section 89(1) Saves You From Double Taxation
Published 30 June 2026 · Tax & Salary
Ritu works for a central government department in Delhi. In March 2026 her employer released pending salary revisions for two prior years — ₹2,40,000 in arrears, paid as a lump sum in the last month of the financial year. Her Form 16 now shows total income of ₹14,40,000 instead of her usual ₹12,00,000. Her tax jumped by ₹73,250. She called a friend who told her about Section 89(1). She had never heard of it.
Why Receiving Arrears in One Year Creates a Tax Problem
When ₹2,40,000 in arrears land in the same year as Ritu's regular ₹12L salary, her total income inflates to ₹14.4L. She gets pushed higher into the 30% bracket for the additional income. But had the arrears been paid in the years they were owed — ₹1,20,000 each year — her effective tax rate on that ₹1,20,000 would have been much lower.
Without Section 89(1), Ritu pays tax on ₹2,40,000 at the current year's marginal rate (effectively 30% on a large portion). With Section 89(1) relief, she pays only what she would have paid if the income had been received in the right years.
Ritu's Section 89(1) Relief: Step-by-Step
All figures under new tax regime, standard deduction ₹75,000 applied.
Step 1 — Tax on total income including arrears (₹14,40,000):
Taxable: ₹14,40,000 – ₹75,000 = ₹13,65,000.
0–4L: ₹0. 4–8L: 5% × ₹4L = ₹20,000. 8–12L: 10% × ₹4L = ₹40,000. 12–13.65L: 15% × ₹1,65,000 = ₹24,750.
Tax: ₹84,750. Cess 4% = ₹3,390. Total: ₹88,140.
Step 2 — Tax on income without arrears (₹12,00,000):
Taxable: ₹12,00,000 – ₹75,000 = ₹11,25,000.
Under new regime, 87A rebate covers up to ₹12L — but taxable income here is ₹11.25L, so rebate applies. Tax = ₹0. Total: ₹0.
Step 3 — Tax attributable to arrears in current year:
₹88,140 – ₹0 = ₹88,140
Step 4 — Tax arrears would have attracted in prior years:
₹1,20,000 additional income each year (2023-24 and 2024-25). In those years Ritu earned ₹10L base income; the ₹1,20,000 addition would fall in the 20% bracket. Estimated extra tax per year: ₹24,000. Total for 2 years: ₹48,000.
Step 5 — Section 89(1) relief = Step 3 – Step 4:
₹88,140 – ₹48,000 = ₹40,140 relief.
Net tax Ritu pays on arrears: ₹88,140 – ₹40,140 = ₹48,000 instead of ₹88,140.
Summary of Section 89(1) Relief
| Item | Amount |
|---|---|
| Tax with arrears lumped in current year | ₹88,140 |
| Tax without arrears (on ₹12L base) | ₹0 |
| Tax attributable to arrears this year | ₹88,140 |
| Tax arrears would have attracted in prior years | ₹48,000 |
| Section 89(1) relief | ₹40,140 |
| Final tax on arrears after relief | ₹48,000 |
How to Claim Section 89(1) Relief: Form 10E
The relief is not automatic. Ritu must file Form 10E on the Income Tax e-filing portal (incometaxindia.gov.in) before submitting her ITR for FY 2025-26. The form asks for the income in each of the prior years, the arrears breakdown, and computes the relief automatically once the data is entered. Without Form 10E, the ITR system will not allow the relief and may flag a mismatch notice.
Form 10E must be filed before the ITR — not simultaneously. File it, get the acknowledgement, then enter the relief amount in the ITR under "Relief under Section 89."
Run this for your own numbers
Calculate Your Tax with Section 89(1) →What Most People Get Wrong
They pay the inflated tax without knowing Section 89(1) exists. The relief is not applied by your employer — your Form 16 will show the full tax amount without it. It is not applied automatically by the IT Department. You must file Form 10E, then claim the relief in your ITR. Many taxpayers discover this only after filing, when the window for that year is closed. The IT Department has issued multiple circulars making it clear that not filing Form 10E before ITR submission will result in the relief being disallowed.
Frequently Asked Questions
What is Section 89(1) relief for salary arrears?
Section 89(1) provides relief when salary arrears, gratuity, VRS compensation, or commuted pension received in one year would be taxed at a higher rate than if spread across the years to which they belong. The relief = (tax on inflated income) minus (tax that would have been payable if spread over prior years).
How do I claim Section 89(1) relief?
File Form 10E on the Income Tax e-filing portal before filing your ITR. Mention the relief amount in ITR under "Relief under Section 89" (Schedule SI or the appropriate field). Without Form 10E, the ITR filing system will reject the claim or raise a mismatch notice.
What types of income qualify for Section 89(1) relief?
Salary arrears (received in a later year for prior years), gratuity in excess of Section 10(10) exemption, VRS compensation above ₹5L, advance salary received for future years, commuted pension received in lump sum.
How is Section 89(1) relief calculated?
Step 1: Calculate tax on current year income including arrears. Step 2: Calculate tax on current year income excluding arrears. Step 3: Difference = excess tax due to arrears. Step 4: Spread the arrears across prior years and calculate how much extra tax would have been due each year. Step 5: Relief = Step 3 minus Step 4 (if positive).
Is Form 10E mandatory for Section 89(1) relief?
Yes — mandatory. The IT Department has repeatedly clarified that the relief is not automatically applied. You must file Form 10E on the Income Tax portal before submitting your ITR. Filing Form 10E after ITR submission or not at all will result in the relief being disallowed.
Have you received salary arrears, excess gratuity, or VRS compensation in a single year — and have you filed Form 10E to claim Section 89(1) relief?