Section 89 of the Income Tax Act, 1961, is a helpful rule designed to save taxpayers money when they receive certain types of income, like salary or family pension, all at once in a single year. This lump sum payment could push someone into a higher tax bracket, meaning they’d pay more tax than if the money was received over several years. Section 89 steps in to make things fair by letting taxpayers calculate their taxes as if the money was received in the years it was actually earned. Below, we’ll explain what Section 89 is, who it helps, how it works, and what you need to do to claim the tax relief it offers in a simple and clear way.
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What is Section 89 of the Income Tax Act, 1961?
Section 89 of Income Tax Act protects people from paying extra taxes when they receive a large payment, like backdated salary or pension, in one go. It’s especially useful for employees, such as government or private sector workers, and pensioners who get money for past periods in a single year.
This section applies to:
Salary paid in arrears or advance: For example, if you get a salary hike for past years or a delayed payment for work done earlier.
Payments considered “profit in lieu of salary”: These include things like compensation when you leave a job or certain bonuses, as defined under Section 17(3) of the Act.
Family pension received in arrears: If someone receiving a family pension (like a widow or dependent) gets a lump sum for multiple past years.
To claim this tax relief, you need to:
Fill out and submit Form 10E online through the Income Tax Department’s e-filing website before filing your Income Tax Return (ITR).
Provide details about the income you received and calculate how much tax relief you’re eligible for by comparing taxes for the year you got the money with the years it relates to.
Applicability and Scope of Section 89 of Income Tax Act
Section 89 helps people who receive certain types of income in a lump sum that would be taxed at a higher rate if it’s all counted in the year they receive it. The income types covered are:
Salary in arrears or advance: This includes payments for work done over more than one year, like delayed salary increments or advance payments for future work.
Profit in lieu of salary (Section 17(3)): This could be money you get when leaving a job, like gratuity or compensation, as long as it fits the rules under Section 17(3).
Family pension in arrears: If you receive a pension (e.g., for a deceased family member) for multiple years all at once, you can claim relief.
For Section 89 to apply, the lump sum payment must cause your total income for the year to be taxed at a higher rate than it would have been if the money was spread out over the years it was meant for. This ensures the rule helps only those who face a tax disadvantage because of the timing of the payment.
Conditions and Limits for Getting Relief
To get tax relief under Section 89, you need to meet certain conditions, and there are some cases where the relief doesn’t apply:
Conditions: You must file Form 10E to apply for the relief and show that the lump sum payment caused you to pay tax at a higher rate than you would have if the income was spread over the relevant years.
Exclusions: You can’t claim relief under Section 89 if you’ve already used an exemption under Section 10(10C) for money received from voluntary retirement or job termination. This prevents you from getting two tax benefits for the same income.
Benefits of Section 89
Section 89 offers important advantages, especially for salaried people and pensioners:
Lower Taxes: By spreading the income over the years it was earned, you avoid paying a higher tax rate just because you received a lump sum in one year.
Fairer Taxation: It ensures you pay tax based on when the money was earned, not when you received it, which makes the tax system more equitable.
Encourages Following Rules: Filing Form 10E helps the tax department verify your claim, ensuring everything is transparent and you get the right refund or tax adjustment.
Also, Learn about Deductions under Section 80C of Income Tax Act, 1961.
How to Calculate the Tax Relief
The tax relief under Section 89 is calculated by comparing how much tax you’d pay in two different scenarios given below. For example, if you received ₹3 lakh in 2025 for salary arrears from 2022-2024, you’d calculate the tax for 2025 with the ₹3 lakh included. Then, you’d calculate the tax for 2022, 2023, and 2024 as if you received ₹1 lakh each year. If the 2025 tax is higher, the difference is your relief:
Tax in the year you received the money: Calculate your total tax for the year you got the lump sum, including the arrears or advance.
Tax if the money was spread over the relevant years: Figure out how much tax you would have paid if the income was received in the years it was meant for, using the tax rates for those years.
Find the difference: The relief is the difference between the tax in step 1 and the total tax in step 2. If the tax in step 1 is higher, you get relief for the difference. If the tax in step 2 is higher, you don’t get any relief because the lump sum didn’t increase your tax burden.
Read Section 147 of Income Tax Act, 1961.
How to Claim Relief: Step-by-Step Process
To claim relief under Section 89, you need to follow specific steps to meet the Income Tax Department’s requirements:
File Form 10E Online: You must submit Form 10E on the Income Tax Department’s e-filing portal before filing your ITR for the year. This form includes details about your income, the arrears or advance you received, and how you calculated the relief.
What to Include in Form 10E: You’ll need to provide your total income for the year, specifics about the lump sum (like how much and what it’s for), and a breakdown of the tax relief calculation, showing the tax difference between the year of receipt and the years the income relates to.
When to File: Form 10E must be filed before your ITR. If you don’t file it, the tax department will not allow the relief, and you might get a notice or owe more tax.
How to File: Log in to the e-filing portal using your PAN, date of birth, and password. Go to the “e-File” section, select Form 10E, and fill in the required details. The portal has guides to help first-time users, making the process straightforward.
Summary
Section 89 of the Income Tax Act, 1961, helps people who receive large payments, like salary or pension arrears, avoid paying extra taxes just because the money was paid in one year. It applies to specific types of income, like backdated salary or family pensions, and requires you to file Form 10E online to claim the relief. By recalculating your taxes as if the money was received in the years it was earned, Section 89 lowers your tax bill and ensures fair taxation. Make sure to follow the rules, especially filing Form 10E, to take advantage of this benefit.
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Section 89 of Income Tax Act: FAQs
Q1. What is relief under Section 89 with an example?
Relief under Section 89 lowers the tax you pay on salary or pension received all at once by taxing it as if it was received in the years it was earned, e.g., If you get ₹3 lakh in 2025 for salary arrears from 2022-2024, Section 89 lets you calculate the tax as if you received ₹1 lakh each year, using the tax rates for 2022, 2023, and 2024. This avoids a higher tax rate in 2025.
Q2. What is the limit of tax relief under Section 89?
There’s no fixed amount for the relief. It’s based on the difference between the tax you’d pay in the year you received the lump sum and the tax you’d pay if the income was spread over the years it relates to, ensuring you only pay what’s fair.
Q3. How do I claim relief under Section 89 for leave encashment?
To claim relief for leave encashment received as arrears, file Form 10E online on the Income Tax e-filing portal before submitting your ITR. Include details of the leave encashment and calculate the relief based on the tax difference for the relevant years.
Q4. What is Section 89 of Income Tax Act Form 10E?
Section 89 offers tax relief for salary or pension received in arrears or advance. Form 10E is the mandatory online form you must file to claim this relief, including details of your income and how the relief is calculated.
Q5.What is income under Section 89?
Section 89 covers income like salary, family pension, or payments like gratuity received in arrears or advance, which would be taxed at a higher rate because it’s paid in a lump sum in one year.
