Taxation

Here's a simplified guide to calculating tax relief on salary arrears:

Understanding the Goal: The aim is to ensure you don't pay a higher tax rate simply because you received past dues in the current year. This process helps determine if you're eligible for tax relief under Section 89(1) of the Income Tax Act.

Step-by-Step Calculation:

1. Calculate Tax on Current Year's Total Income (Including Arrears):

   • Determine your total income for the financial year in which you received the arrears. This includes the arrear amount.

   • Calculate the income tax payable on this total income as per the applicable slab rates for that year.

2. Calculate Tax on Current Year's Total Income (Excluding Arrears):

   • From your total income (as in Step 1), subtract the arrear amount. You can find the arrear amount from the document provided by your employer and your total salary (including arrears) from Form 16.

   • Calculate the income tax payable on this adjusted income (without arrears) for the current year.

3. Find the Tax Difference for the Current Year:

   • Subtract the tax calculated in Step 2 from the tax calculated in Step 1. This is the additional tax you're paying in the current year due to the arrears.

4. Calculate Tax for the Arrear Year (Excluding Arrears):

   • Identify the financial year(s) to which the arrears pertain.

   • For each such year, determine your total income excluding the portion of arrears related to that specific year.

   • Calculate the income tax payable on this income based on the slab rates applicable for that particular arrear year.

5. Calculate Tax for the Arrear Year (Including Arrears):

   • For each arrear year, add the portion of arrears relevant to that year to the total income (as determined in Step 4).

   • Calculate the income tax payable on this new total income (including the respective arrear portion) using the slab rates of that arrear year.

6. Find the Tax Difference for Each Arrear Year:

   • For each arrear year, subtract the tax calculated in Step 4 from the tax calculated in Step 5. This is the actual tax liability on the arrear amount for that specific year.

   • If arrears pertain to multiple years, sum up these differences for all relevant arrear years.

7. Determine Tax Relief:

   • Compare the amount from Step 3 (additional tax paid in the current year) with the total amount from Step 6 (actual tax liability on arrears for the respective arrear years).

   • Relief Allowed: If the amount in Step 3 is greater than the amount in Step 6, the difference between the two is the tax relief you can claim.

   • No Relief: If the amount in Step 6 is greater than or equal to the amount in Step 3, no relief is available.

Alternative Method:

You can also use the tools and calculators available on the official income tax department website to compute the tax relief on arrears.

Filing Your Return:

Once you have calculated the relief amount (if any), you can enter this value when filing your income tax return (e.g., using platforms like Easy Return).