Income tax is applicable and calculated on the taxpayer’s total income earned or received during the financial year. If the taxpayer has received a portion of their salary ‘in arrears or in advance’, or received a Family Pension in arrears, to reduce this tax burden, the assessee can claim relief under section 89. The assessee might have to pay higher taxes because the arrear /advance salary is taxed in the year of receipt, not in the year it is due. The difference in the tax liability in the due year and the receipt year might be due to changes in the slab rates. For this reason, the provision of relief u/s 89 comes in. An employee must meet certain conditions to claim relief under Section 89(1):-
- Salary is received in arrears or in advance;
- Salary received for more than 12 months in one financial year;
- Family Pension is received in arrears;
- Compensation on termination of employment; and
- Commuted Pension
One important thing to note is that relief can only be claimed if the tax payable is higher due to the receipt of such arrears. If there is no extra tax liability, relief is not allowed.