New Delhi, July 17: With the 7th Pay Commission recommendations being implemented, government employees are paid arrears of salaries and allowances with a retrospective effect.
For the financial year 2017-18, lakhs of employees received arrears following the recommendations of the 7th Pay Commission which was implemented with effect from January 1 2016. The pay panel, it may be recalled had recommended an average of 23.55 per cent increase in the salary, allowance and pension.
As per the Income Tax Act, the head salary is taxable on paid, dues or arrears basis, whichever happens earlier. This means that the arrears will be taxable in the year in which they are paid to the employees. As the arrears belonged to the previous years, they ought to have been taxed in those years itself. The arrears however shall be taxable in the year in which they are paid to employees due to the provisions under Section 15 of the IT Act.
While employees getting arrears of salary or pension have to pay higher tax during the years it has been received, there is relief provided to them under Section 89 of the act.
The Act states that if an individual receives any portion of his salary in arrears or in advance, then he can claim relief in respect of such salary received. The relief on arrears of salary is calculated in the manner laid down under Rule 21A of the Income-Tax Rules, 1962. Tax relief is determined by recalculating the income tax liability of two financial years, i.e., year in which arrear is received and year to which these arrears pertain to. If the outcome of calculations confirms that excess tax is being paid by the taxpayers on arrears, the relief shall be allowed for such excess tax.
How to claim relief under Section 89 for 7th Pay Commission arrears:
- An employee would need to file Form 10E online on the website of the IT department- https://www.incometaxindiaefiling.gov.in
- In order to file Form 10E, the taxpayer needs to go to the 'e-File' option in the menu and select 'Income Tax Forms'. Click on 'Continue' after selecting Form name, Assessment Year and Submission Mode.
Form 10E contains 5 Annexures applicable to different types of arrears of Income:
- Annexure I is for salary received in advance or in arrears.
- Annexure II is for gratuity received for past services for the period of 5 years to 15 years.
- Annexure IIA is for gratuity received for past services for 15 years or more.
- Annexure III is for compensation received for termination of employment.
- Annexure IV is for commuted pension received.
In order to claim relief for the 7th Pay Commission arrears, one would need to fill in the details under Annexure 1. The Form 10E will automatically calculate the relief available to the taxpayer under Section 89. After filling the form, one needs to claim the relief in the ITR. The relief needs to be mentioned under the Tax Relief Column.