Your tax bill may increase if you receive arrears or additional payments, which would put you in a higher tax bracket. In addition to pay, arrears may involve other sources of income. A comprehensive list of what qualifies as arrears for tax purposes is provided below:
- Any unpaid bonuses, allowances, or back pay are included in the salary.
- Arrear income is defined as lump sum payments made to make up for missed pension instalments.
- In the year that it is received, back rent from tenants who withheld payments in previous months is regarded as income.
- Interest payments are taxable in the year they are received if they are made over a longer period.
- Any income, such as dividends, royalties, or contractual payments, that you were entitled to receive the prior year but were not paid on time or were withheld is considered arrears when it is received.
Your total revenue will rise if you receive a significant amount of arrears this year. You may be placed in a higher tax bracket as a result of this than you otherwise would have been. Consequently, a larger portion of your income is subject to a higher tax rate, increasing your overall tax obligation.
Also Read: Income Tax: Make note of these 5 key points if you are a salaried taxpayer
The important thing to remember is that even if these payments relate to money you were supposed to receive earlier, the tax authorities will count them as income for the year in which they are received. You might end up in a higher tax bracket this year as a result of this.
Here’s why receiving arrears or additional payments can increase your tax liability:
Tax is calculated on total income: Income tax is determined based on your total taxable income for the year.
Arrears are added to current income: Received arrears are applied to current year earnings.
Tax brackets have thresholds: Tax brackets define income ranges with different tax rates. As your income increases, you may move into a higher tax bracket, resulting in a higher tax rate on the additional income.
Also Read: Income Tax: Filing ITR early this time? It is vital to know these 5 key points
Relevant income tax provisions
For Indian taxpayers who receive wage arrears, Section 89(1) of the Income Tax Act, 1961, is a key clause. It talks about the potential for your tax burden to go up if you fall behind on your payments and have to make additional payments.
This is the relief provided by Section 89(1):
Recalculates tax for both years: The tax is recalculated for the year that the arrears are received and the year that they relate to when you make a claim for relief under this provision.
Lessens the tax liability: This recalculation ensures that the delay in receiving your income does not result in you having to pay additional taxes. Rather, you will pay the tax that you would have paid in the first year if you had received the income.
Fill out Form 10E and send it in with your income tax return to get this relief. It is advised that you seek guidance from a tax advisor regarding the specific requirements and the proper application of Section 89(1) to your situation.
Also Read: Income Tax: How to authenticate notice issued by the department? A step-by-step guide
How to file an ITR and request relief under Section 89(1)?
Follow these procedures to be eligible for Section 89(1) relief from tax on salary arrears in India:
Step 1: First, fill out Form 10E. To pursue relief under Section 89(1), Form 10E must be filed. The Income Tax Department’s e-filing portal can be used to electronically submit Form 10E. First, log into your portal account to access the form. Form 10E asks for details regarding salary arrears, such as the total amount owed, the applicable fiscal year, and the reason for the delay.
Step 2: Enclose your income tax return (ITR) with us. Make sure you include the salary arrears as part of your current year’s income when filing your Income Tax Return (ITR). But do note that you are requesting relief according to Section 89(1). There should be a specific option on the ITR form for this use.
But before filing their ITR, taxpayers should be aware of the importance of filling out Form 10E. The income tax department advises speaking with a tax expert about Section 89(1) relief and completing Form 10E. They can assist you in maximising your tax benefits and fulfilling all requirements.
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Published: 23 May 2024, 03:59 PM IST