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Taxability on Salary Arrears: 7th Pay Commission or 11th Bipartite settlement

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Taxability on Salary Arrears: 7th Pay Commission or 11th Bipartite settlement

Pay Commission is set up by  Normally, Revision in Pay Commission happens every 10 years. Pay commission is for Central Government and for PSB (Public Sector Bank), it is called Bipartite Settlement. Revision on Bipartite agreement happens every Five Years. Till Now Government had successfully revised 6th time Pay Commission for Central Government Employees and 10th time bipartite settlement for Bank Employees. However, 7th Pay Commission  was already due with effect from 1st January 2016 but yet to be implemented fully in all parts of the country and 11th bipartite settlement was also already due on 1st November 2017, which is not yet implemented . All the Government employees are eagerly waiting for the 7th Pay commission/11th Bipartite settlement to be implemented as it will increase their allowances, salary, and other benefits. Increase in allowances, salary, and other benefits will increase tax liability also. Let us understand taxability on such revisions

What is Arrears of Salary

Under Section 15 of the Income-tax Act, 1961, Salary is taxable when it is due or when it is actually received, whichever is earlier except Arrears on Salary which are usually announced from a back date and therefore cannot be taxed when due. 
Any amount of salary received from present or past employer during relevant previous year and which relates to some earlier previous years, is treated as arrears of salary. It is taxable in the year in which it is received and not the year to which it belongs.

In Current Scenario, Government employees are likely to receive their arrear on salary in one assessment year, when an employee receives arrears of salary for the previous years, which was not taxed earlier on due basis, then salary received is taxed on receipt basis.  Taxability on such arrear will increase substantially as it will unnecessary shift the Individual on highest tax bracket or even charging surcharge etc. With a view to granting relief to Individual tax payers in such cases, the current income-tax law allows relief under section 89 of the Income-tax Act, 1961.

What is relief under section 89 of the Income-tax Act, 1961?

If an individual receives any portion of his salary in arrears or in advances or receives profit in lieu of salary, he can claim relief in terms of section 89 read with rule 21A of the Income-tax Rules, 1962. Computation of relief is being provided in Rule 21A.  Rule 21A(1) reads as follows:

 “Where, by reason of any portion of an assessee's salary being paid in arrears or in advance or, by reason of any portion of family pension received by an assessee being paid in arrears or, by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary, his income is assessed at a rate higher than that at which it would otherwise have been assessed, the relief to be granted under sub-section (1) of section 89 shall be..

Here’s how you can calculate the tax relief yourself –

Step 1:

Step 2: Calculate tax payable on the total income, excluding additional salary in the year when it is received.

After knowing the amount of arrears, one needs to calculate the tax over the same.

Step 3: Calculate the difference between Step 1 and Step 2.

Step 4: Calculate tax payable on the total income of the year to which the arrears relate, excluding arrears.

Step 5: Calculate tax payable on the total income of the year to which the arrears relate, including arrears

Step 6: Calculate the difference between Step 4 and Step 5.

Step 7: Excess of amount at Step 3 over Step 6 is the tax relief that shall be allowed.

If the amount in Step 6 is more than the amount in Step 3, no relief shall be allowed.

 

Let us understand this with the help of an example:

 

AS is Bank employee who has received his arrear of salary on account of 11th bipartite settlement which is as follows:

 

Particular

Per Month Salary

*AY 2019-20

Per Month Salary

AY 2018-19

Basic Salary

60,000

50,000

Dearness Allowance

20,000

17,000

Special Allowance

5,000

3,000

     

Total Taxable Income

85,000

70,000

 

With effect from November 1, 2017, 11th bipartite settlement is due, and it has been decided to increase 20% on December 31, 2018.

*Adjustment on account of 11th bipartite agreement has already been adjusted in AY 2019-20.

 

As it involved Two Assessment Years, we need to have tax slabs for two years

Income Tax Slab for AY 2019-20

 

Slabs

Tax Rate

Health and Education Cess

Income up to Rs 2,50,000

No tax

 

Income from Rs 2,50,000 – Rs 5,00,000

5%

4% of Income Tax

Income from Rs 5,00,000 – 10,00,000

20%

4% of Income Tax

Income more than Rs 10,00,000

30%

4% of Income Tax

 

Income Tax Slab for AY 2018-19

 

Slabs

Tax Rate

Education Cess

Income up to Rs 2,50,000

No tax

 

Income from Rs 2,50,000 – Rs 5,00,000

5%

3% of Income Tax

Income from Rs 5,00,000 – 10,00,000

20%

3% of Income Tax

  Income more than Rs 10,00,000

30%

3% of Income Tax

 

                                                                             (Amount in Rupees)

Assessment Year

AY 2019- 20

AY 2018-19

 Income Before Arrears

10,20,000

8,40,000

Tax Liability on the same ( A )

1,23, 240

82,915

Arrears ( 14,000 per Months From  Nov 1, 2017 to Mar 31, 2018)

70,000

70,000

Income After Arrears (Income+ Arrears )

10,90,000

9,10,000

Tax Liability on the same ( B )

1,45,080

97,335

Tax liability (B – A)

21,840

14,420

Tax Relief under Section 89

(21,840-14,420)

 

7,420

Tax payable for AY 2019-20

(1,45,080-7,420)

 

1,37,660

 

 

Now let us understand the Calculation for above table.

 

Step 1: Calculate tax payable on the total income, including additional salary for the Assessment Year 2019-20 – in the year it is received. Rupees 1,45,080

Step 2: Calculate tax payable on the total income, excluding additional salary for the Assessment Year 2019-20 in the year it is received.  Rupees 1,23,240

After knowing the amount after arrear, you need to calculate the tax over the same.

Step 3: Calculate the difference between Step 1 and Step 2. (Rs. 1,45,080 - 1,23,240) =Rupees 21,840

Step 4: Calculate tax payable on the total income of the Assessment Year 2018-19 to which the arrears relate, excluding arrears. Rupees 82,815

Step 5: Calculate tax payable on the total income the Assessment Year 2018-19 to which the arrears relate, including arrears Rupees 97,335

Step 6: Calculate the difference between Step 4 and Step 5. (Rs. 97,335 – 82,815) = Rupees 14,420

Step 7: Excess of amount at Step 3 over Step 6 is the tax relief that shall be allowed.

           Rs. 21,840 – Rs. 14,420 = Rs. 7,420

If the amount in Step 6 is more than the amount in Step 3, no relief shall be allowed.

If you consider arrears payment as income for only present financial year, you would be paying Rs 7420 extra as taxes, without any fault of yours which sound bit illogical. So the income-tax law (section 89) allows you to pay only amount that is payable considering as if you have received that income in AY 18-19 and has provided appropriate relief for tax payers.

 

Therefore, AS is eligible to get relief under section 89 for Rs. 7,420. Accordingly, his tax liability will be Rupees 1,37,660.

This Example involves two Assessment years which is most likely applicable for Bank Employees, However, 7th Central Pay Commission involves three Assessment Years as it was applicable with effect from January 1, 2016.  Let us understand with the help of an Example:

 

Mr. MV is CPSU Employee who has received his arrear of salary on account 7th Pay Commission which is as follows:

AY

AY 2019-20 *

AY 2018-19

AY 2017-18

Particular

Per Month Salary

Per Month Salary

Per Month Salary

Basic  Salary

60,000

50,000

40000

Dearness Allowances

2,000

1,000

1000

Other Allowance

24,000

20,000

16,000

       

Total Taxable Income

86,000

71,000

57,000

       

Annual Taxable Income

10,32,000

8,52,000

6,84,000

 

With effect from January 1, 2017, 7th Pay Commission is due, and it has been decided to increase 25% on December 31, 2018.

*Adjustment on account of 7th Pay Commission has been already adjusted in AY 2019-20.

 

As it involved 3 Assessment Years, we need to have tax slabs for three years

 

Income Tax Slab for AY 2019-20

 

Slabs

Tax Rate

Health and Education Cess

Income up to Rs 2,50,000

No tax

 

Income from Rs 2,50,000 – Rs 5,00,000

5%

4% of Income Tax

Income from Rs 5,00,000 – 10,00,000

20%

4% of Income Tax

Income more than Rs 10,00,000

30%

4% of Income Tax

 

Income Tax Slab for AY 2018-19

 

Slabs

Tax Rate

Education Cess

Income up to Rs 2,50,000

No tax

 

Income from Rs 2,50,000 – Rs 5,00,000

5%

3% of Income Tax

Income from Rs 5,00,000 – 10,00,000

20%

3% of Income Tax

  Income more than Rs 10,00,000

30%

3% of Income Tax

     

Income Tax Slab for AY 2017-18

 

Slabs

Tax Rate

Education Cess

Income up to Rs 2,50,000

No tax

 

Income from Rs 2,50,000 – Rs 5,00,000

10%

3% of Income Tax

Income from Rs 5,00,000 – 10,00,000

20%

3% of Income Tax

  Income more than Rs 10,00,000

30%

3% of Income Tax

 

Assessment Year

AY 2019- 20

AY 2018-19

AY 2017-18

 Income Before Arrears

10,32,000

8,52,000

6,84,000

Tax Liability on the same ( A )

1,26,984

85,387

63,654

Arrears ( 25% Increment From 
Jan 1, 2017 to March 31, 2018)

2,55,750

2,13,000

42,750

Income After Arrears (Income+ Arrears)

12,87,750

10,65,000

7,26,750

Tax Liability on the same ( B )

2,06,778

1,35,960

72,461

Tax liability (B – A)

79,794

50,573

8,807

Tax Relief under Section 89(1)

(79,794-50,573-8,807)

20,414

 

 

Tax payable for AY 2019-20

 1,86,364                          

 

 

(2,06,778-20414)

 

Now let us understand the Calculation for above table.

 

Step 1: Calculate tax payable on the total income, including additional salary for the Assessment Year 2019-20 – in the year it is received. Rupees 2,06,778

Step 2: Calculate tax payable on the total income, excluding additional salary for the Assessment Year 2019-20 in the year it is received.  Rupees 1,26,984

After knowing the amount after arrear, you need to calculate the tax over the same.

Step 3: Calculate the difference between Step 1 and Step 2. (Rs.2,06,778 - 1,26,984) = Rupees 79,794

Step 4: Calculate tax payable on the total income of the Assessment Year 2018-19 to which the arrears relate, excluding arrears. Rupees 1,35,960

Step 5: Calculate tax payable on the total income the Assessment Year 2018-19 to which the arrears relate, including arrears Rupees 85,387

Step 6: Calculate the difference between Step 4 and Step 5. (Rs.1,35,960 - 85,387) = Rupees 50,573

Step 7: Calculate tax payable on the total income of the Assessment Year 2017-18 to which the arrears relate, excluding arrears. Rupees 72,461

Step 8: Calculate tax payable on the total income the Assessment Year 2017-18 to which the arrears relate, including arrears Rupees 63,654

Step 9: Calculate the difference between Step 4 and Step 5. (Rs.72,461 – 63,654)Rupees 8,807

Step 10: Excess of amount at Step 3 over (Step 6 Plus Step 9) is the tax relief that shall be allowed.

           Rupees 79,794 - Rupees  50,573- Rupees 8,807 = Rs. 20,414

If the amount in (Step 6 + Step 9) is more than the amount in Step 3, no relief shall be allowed.

So, MV is allowed to claim relief under section 89 of Rs. 20,414. Accordingly Tax liability will be amounting to Rs. 1,86,364 for AY 2019-20.

 

 

How to Claim Relief Under Section 89


After understanding the computation under section 89 of the Income-tax Act, 1961, Let us understand how to claim such relief practically while filling Income tax Return. To claims the benefit of provisions under section 89, filing of Form No.10E is mandatory. In case, taxpayer has forgotten to file Form No. 10E and claimed Relief under Section 89,then he shall be receiving an income tax notice from the Department sooner stating as follows (generally):

The relief u/s 89 has not been allowed in your case, as the online form 10E has not been filed by you. The furnishing of Online form 10E is required as per sec.89 of the Income Tax Act”

 

Form No. 10E contains 5 Annexure applicable to different types of arrears of Income:

  1. Annexure I is for salary received in advance or in arrears.
  2. Annexure II is for gratuity received for past services for the period exceeding 5 years but less than 15 years.
  3. Annexure IIA is for gratuity received for past services for 15 years or more.
  4. Annexure III is for compensation received for termination of employment.
  5. Annexure IV is for commuted pension received.

 

This form can be filed online on the income tax e-filing portal. Following are the steps to fill Form No. 10E online:

 

  1. Login to https://incometaxindiaefiling.gov.in/with your User ID and Go to Tab ‘e-File’ - ‘Income Tax Forms’ as shown in the screenshot below:

 

  1. Select the option ‘Form No. 10E’ from Form Name Options, relevant Assessment Year (eg 2018-19) and Submission Mode : Prepare and submit Online as shown in the screenshot below.

 

  1. Fill the Necessary details on Tab Menu ‘10E’ and Select the “Annexure I ” for Arrear of Salary as shown in the screenshot below:

 

  1. Fill the Details in “Annexure- I” regarding your arrears of salary as shown in the screenshot below:

 

  1. Check your relief amount accordingly and submit the same. Please note that it is mandatory to file Form No. 10E in order to get relief under section 89. After filing of Form No. 10E, the next step is to claim such relief in the ITR Form. The amount of relief calculated by Form No. 10E is to be mentioned under ‘Tax Relief’ column under Tab ‘Computation and Income Tax’ of the ITR form as shown Below:

 

  1. Your Tax liability will be decreased by the amount clamed under 89.

 

Key Points to Remember before Filling of Income Tax Return:

Most of the central government and public sector bank employees received or will be receiving arrears of salary in the assessment Year 2019-20. It is important to consider following points before filling Income Tax Return:

 

  • Salary is taxable when it is due or when it is actually received, whichever is earlier except Arrears on salary which are usually announced from a back date and therefore cannot be taxed when due.

 

  • Arrears on salary are taxable on receipt basis. However, one can claim relief under section 89, as arrears may put individual tax payer on Higher Tax Bracket.

 

  • Individuals can get relief on account of arrears in salary to the extent of difference between Increase in the Tax Liability of Current year and Increase in Tax liability as if tax payer has received that income in the Assessment year for which it is pertains;

 

  • It is Mandatory to file Form No. 10E online before filling of ITR to claim relief under section 89. In case, you haven’t file Form No. 10E and claimed Relief under Section 89, the tax payer will be receiving an income tax notice from the Income Tax Department Shortly.
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