Relief Under Section 89: Tax on Salary Arrears

When you receive salary arrears, gratuity or commuted pension in one year, it can push you into a higher tax bracket. Relief under Section 89 of the Income Tax Act eases this by recalculating tax as if the income belonged to the years it relates to. You claim it by filing Form 10E before your return.

Introduction

Salary income, by its very nature, is not always received uniformly across financial years. Employees may receive arrears of salary, gratuity, commuted pension, or other payments that relate to past years but are taxable in the year of receipt. This bunching of income in a single year can push the taxpayer into a higher tax bracket, resulting in a disproportionately higher tax liability than would have arisen had the income been received in the years to which it actually pertained.

To mitigate this inequity, the Income Tax Act, 2025 provides relief under Section 157, read with Rule-73 of the Income Tax Rules. This provision ensures that a taxpayer does not suffer an additional tax burden merely because of the timing of receipt of salary-related income.

What is Section 157?

Section 157 grants relief to a taxpayer when salary or other specified receipts for a previous year are received in advance or in arrears in a different year. In simple terms, if you receive salary dues or arrears in a lump sum that relates to earlier years, your tax liability is recalculated as if the income had been spread across those earlier years — and the excess tax paid on account of the bunching is treated as relief.

The provision reads:

“Where, by reason of any portion of an assesse’s salary being paid in arrears or in advance… the assesse is assessed at a rate of tax higher than that at which he would otherwise have been assessed, the Assessing Officer shall grant such relief as may be prescribed.”

The relief is not an exemption — it is a recalibration of tax to ensure fairness.

Types of Receipts Eligible for Relief

Section 157 covers the following categories of income:

• Salary received in arrears or in advance — salary dues of prior years received in the current year, or salary paid before it falls due.
  
• Gratuity — payment on retirement or death in excess of the exemption limit.
  
• Commuted pension — lump-sum pension received in lieu of periodic pension.
  
• Compensation on termination of employment — payments received on retrenchment or voluntary retirement.
  
• Payment received under Keyman Insurance Policy.
  
• Arrears of family pension — received by the legal heirs of a deceased employee.
  

How is the Relief Calculated? (Rule 73)

The computation of relief under Section 157 is governed by Rule 73 of the Income Tax Rules. The methodology, though straightforward in concept, requires a step-by-step approach:

Step-by-Step Calculation for Salary Arrears

Step 1: Calculate the tax on your total income of the current year (i.e., the year of receipt), including the arrears — call this Tax A.

Step 2: Calculate the tax on your total income of the current year, excluding the arrears — call this Tax B.

Step 3: The difference (Tax A − Tax B) is the extra tax paid in the current year on account of the arrears.

Step 4: For each previous year to which the arrears relate, add the relevant portion of the arrears to the income of that year and compute tax — call this Tax C (for each such year).

Step 5: Compute the tax on the total income of each previous year without adding the arrears — call this Tax D.

Step 6: The difference (Tax C − Tax D), summed across all relevant previous years, represents the additional tax that would have been payable had the arrears been received in time — call the total Tax E.

Step 7:

• If Tax A − Tax B > Tax E
  Relief = (Tax A − Tax B) − Tax E
  
• If Tax A − Tax B ≤ Tax E
  No relief is admissible.
  

Illustrative Example

Scenario

Mr. Ramesh received arrears of salary of ₹3,00,000 in FY 2024-25, pertaining to FY 2022-23 (₹1,50,000) and FY 2023-24 (₹1,50,000). His other salary income in FY 2024-25 is ₹8,00,000.

How to Claim the Relief — Form 39

A critical procedural requirement is that the taxpayer must file Form 39 on the Income Tax e-filing portal before filing the Income Tax Return (ITR). If Form 39 is not filed, the relief under Section 157 will be disallowed, and the taxpayer may receive a deficiency notice from the department.

Steps to File Form 39

1. Log in to the Income Tax e-filing portal.
   
2. Navigate to e-File → Income Tax Forms → File Income Tax Forms.
   
3. Select Form 39 and choose the relevant assessment year.
   
4. Fill in the details of the arrears, the years to which they relate, and the computed tax figures.
   
5. Submit and e-verify the form.
   
6. Thereafter, claim the relief in the ITR under the relevant schedule.
   

Important

The Supreme Court and various High Courts have consistently held that filing Form 39 is a mandatory pre-condition for claiming relief under Section 157.

New Tax Regime and Section 157

With the introduction of the new tax regime, a question arises about the applicability of Section 157. The relief is available under both the old and new tax regimes. However, the computation must be done consistently — if a taxpayer opts for the new regime in the year of receipt, the tax computations for previous years must also be done under the regime applicable in those years.

Taxpayers should exercise care to ensure the calculations reflect the correct regime for each year.

Common Mistakes to Avoid

• Not filing Form 39 before the ITR — this is the most common error and leads to automatic disallowance of the relief.
  
• Including wrong years — arrears must be mapped correctly to the years they pertain to.
  
• Ignoring tax rebates and deductions — tax computation for each year must include all eligible deductions and rebates applicable in those years.
  
• Treating relief as exemption — Section 157 provides relief from excess tax, not an exemption from income.
  
• Using wrong income figures — the total income for each past year must be the actual income of that year, not a notional figure.
  

Employer’s Role: Form 16 and TDS

Employers are responsible for computing TDS on salary. When arrears are paid, the employer should ideally factor in the Section 157 relief while deducting TDS, provided the employee furnishes the relevant details.

However, in practice, many employers deduct TDS without accounting for the relief. In such cases, the employee can claim the relief while filing the ITR and seek a refund of excess TDS.

Conclusion

Section 157 is a humane and equitable provision of Indian tax law that prevents salaried taxpayers from being penalised for circumstances beyond their control — such as delayed payment of salary dues or receipt of terminal benefits in a lump sum.

By spreading the tax burden across the years to which the income relates, it ensures that the taxpayer’s effective tax rate is not artificially inflated.

However, the relief is not automatic. Taxpayers must be proactive in filing Form 39 and ensuring accurate computation as per Rule 73. Given the complexity of the calculations, especially when arrears span multiple years, it is advisable to seek professional assistance or use the department’s online calculator to arrive at the correct figure.

Understanding and claiming relief under Section 157 is not just a tax-planning opportunity — it is every eligible taxpayer’s right.

Frequently Asked Questions

What is relief under Section 89?

It reduces the extra tax when past-year income like salary arrears is received as a lump sum in the current year.

How do I claim Section 89 relief?

Calculate the relief and file Form 10E on the income tax portal before filing your ITR.

What payments qualify for Section 89 relief?

Salary arrears or advance, gratuity, commuted pension and certain other specified receipts.

What happens if I don’t file Form 10E?

The relief can be disallowed, so Form 10E must be filed to claim Section 89 relief.