Section 89 and Section 89(1) of the Income Tax Act provides for Relief on Salary Arrears or Salary Advanced received by an Employee in the Previous Year. Section 89 is relatively new section to the Income Tax Act. When an employee receives arrears salary in the current year, automatically this will increase their Tax liability. In our previous article, we have also explained section 194A and 80D in laymen terms.
Section 89 Relief Calculation:
|Step 1||Calculate Tax Liability for the current year including the salary arrears|
|Step 2||Calculate Tax for the current year excluding the salary amount received as arrears|
|Step 3||(Step 1 – Step 2) = X|
|Step 4||Compute Tax Liability in the year in which arrears would have been actually received INCLUDING this arrears amount|
|Step 5||Compute Tax Liability in the year in which arrears would have been actually received EXCLUDING this arrears amount|
|Step 6||(Step 4 – Step 5) = Y|
|Final Step||Relief u/s 89 = (X – Y)|
Section 89 Example with Illustration
Mr. Virkam, an employee of HDFC Bank, furnishes the following details for the Previous Year:
|Salary for the Current Year||Rs.7,25,000|
|Arrears Salary for 2011-12 received||Rs. 80,000|
|Assessed Income for the financial year 2011-12||Rs.2,40,000|
You are requested calculate relief under section 89 of the Income-tax Act, 1961 and the tax payable for assessment year 2016-17.
(Step 1 – Step 1) = Rs. 16,480 (88,580-72,100)
(Step 4 – Step 5) = Rs. 10,300 (18,540-8,240)
Therefore, Relief u/s 89 is Rs.6,180
How is advance salary taxed in the hands of an employee? Is the tax treatment same for loan or advance against salary?
Advance salary is taxable when it is received by the employee, irrespective of the fact whether it is due or not.
In certain cases it arises where, advance salary is included and assumed as salary income in particular previous year, the tax rate at which the Employee’s tax liability is assessed may be higher than the normal rate of tax to which he would have been assessed. Section 89(1) provides for relief in such type of cases.
Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified installments, the loan amount cannot be brought to tax as salary of the employee.