If an employee received an amount of arrear/advance for salary in any financila year related to previous year. There is always a big question.
Whether employee has to pay the tax on whole the income in current assessment year?
Ans: No
Why?
Because "section 89(1)" of Indian Income Tax Act 1961 provides relief to salaried employee.
Whether employee has to pay the tax on whole the income in current assessment year?
Ans: No
Why?
Because "section 89(1)" of Indian Income Tax Act 1961 provides relief to salaried employee.
If any employee received arrears advance of salary in financial year 2014-15 related to previous years then his tax liability will be on higher side due to arrears amount received in FY 2014-15. For reducing his tax Liability. He has to bifurcate his income from arrears in respective years on notional basis to avail relief u/s 89(1).
Method of calculating the Relief u/s 89(1)
1. Calculate the tax payable on the total income including the additional salary (arrears) of relevant previous year in which the same is received.(Receipt Basis)
2. Calculate the tax payable on the total income, excluding the additional salary of the relevant previous year in which the same is received. (Receipt Basis)
3. Find out the difference in tax between (1) and (2) as calculated above.
4. Compute tax on total income after excluding the additional salary in the previous year to which such salary relates. (Accrual Basis)
5. Compute the Tax on the total income after including the additional salary in the previous year to which such salary relates. (Accrual Basis)
6. Find out the difference in tax between (4) and (5) as calculated above.
7. The excess of the tax computed at (3) over the tax computed at (6) is the amount of relief admissible u/s 89(1).
I tried to prepare an easy calculator for calculation of relief under section 89(1) with Table A, Annexure 1 and form 10E.
Click here to download
