TDS on Arrears of Salary: Why Section 89(1) Relief Can Save You Lakhs on a Backdated Hike
TL;DR
- Salary arrears are paid in a lump sum for past years but taxed in the year of receipt, which can push you into a higher slab.
- Section 89(1) of the Income Tax Act offers relief by spreading the arrears notionally back to the years they relate to.
- Form 10E must be filed on incometax.gov.in before you file your ITR for AY 2026-27 to claim this relief.
- Your employer can incorporate Section 89(1) relief into your TDS calculation if you submit Form 10E and proof early.
- Without filing Form 10E, your relief claim in the ITR will be disallowed and a Section 143(1) intimation will follow.
What this means in plain terms
Arrears arrive in many shapes. A delayed wage revision in your PSU job, a backdated promotion in your private firm, the result of a long-pending court order, a pay commission settlement. Whatever the cause, the rupees sit on your account in a single financial year even though they were earned over multiple years.
The Income Tax Act taxes income on a receipt basis for salary. So the entire lump sum becomes taxable in the year you got it, often pushing you into the 30% slab and a higher surcharge bracket. That is rough, because if the same amount had been paid year by year, it would have been taxed at much lower rates. Section 89(1) corrects this anomaly by computing what the tax would have been if the arrears had reached you on time, and lets you claim the difference as relief.
How Section 89(1) relief works
The notional reallocation method
Under Rule 21A of the Income Tax Rules, the relief is calculated in two scenarios. Scenario A computes the actual tax payable in the year of receipt including the arrears. Scenario B computes the hypothetical total tax that would have been payable if each year's portion of the arrears had been taxed in its own year. The difference between A and B is your relief.
Two-step tax calculation
You first compute tax on your total income (including arrears) for the year of receipt. Then you compute tax on the total income excluding arrears. The difference is the extra tax caused by arrears. Next, you go back to each previous year, add the relevant portion of arrears to that year's income, recompute the tax, and find the additional tax for that year. Sum those across all the years. The relief is the extra tax in the current year minus this sum.
Filing Form 10E
The mechanical filing is straightforward. Log in to incometax.gov.in, choose e-File, then Income Tax Forms, then File Income Tax Forms, and select Form 10E. The form auto-pulls some data and asks you to fill in income from previous years. Submit it before you submit your ITR. The acknowledgement number then appears in your ITR while claiming relief.
When arrears typically arise
Pay commission and government revisions
Central and state government employees see arrears every time a pay commission revises wages retroactively, sometimes covering two or three years. The arrears reach lakhs and the additional TDS can be enormous.
Delayed bonuses, increments, or back pay
In the private sector, a delayed annual increment, a court order, or a settlement after a wage dispute can lead to arrears. Even a backdated promotion that takes effect from a previous date but is paid out in the current year qualifies.
Voluntary retirement, gratuity, or pension arrears
Section 89(1) applies to more than salary arrears. Family pension arrears, pension dues paid after delay, and certain VRS payments also qualify under specific conditions, though the calculation rules vary.
How TDS handles arrears
Section 192(2A) and employer responsibility
Section 192(2A) requires your employer to take into account the relief under Section 89(1) while computing the TDS on salary that includes arrears. To use this, you must give them a written declaration in Form 10E with the relief computation. If you do not, they will deduct TDS on the gross amount as if all of it is current year income.
Lump sum withholding without relief
If your employer is unable or unwilling to apply Section 89(1) in TDS, they will withhold tax on the full arrears at the highest slab applicable. This may take Rs. 30,000 to Rs. 50,000 or more extra from your account in the month of payment. You will recover this only at the time of filing your ITR.
The match with ITR
When you file your ITR, you will claim the relief under Section 89 in the appropriate schedule. The system cross-references your Form 10E filing. Without Form 10E, the claim is disallowed automatically and a Section 143(1) intimation arrives with a demand.
A real example
Kavya, 41, Rs. 12L current CTC, Bengaluru, is a senior teacher in a government-aided school. After a long-pending wage revision is approved in November 2025, she receives Rs. 4,80,000 as arrears covering FY 2022-23, FY 2023-24, and FY 2024-25 — Rs. 1,60,000 per year approximately. Her current FY 2025-26 salary excluding arrears is Rs. 12,00,000.
Here is the calculation she does with Form 10E:
- Total income for FY 2025-26 with arrears is Rs. 16,80,000. Tax under old slabs (taking standard deduction and Rs. 1,50,000 80C) is roughly Rs. 2,84,000 plus cess, total Rs. 2,95,000.
- Without the arrears, total income is Rs. 12,00,000. Tax would have been Rs. 1,40,000 plus cess, total Rs. 1,46,000.
- Excess tax in FY 2025-26 because of arrears is Rs. 2,95,000 minus Rs. 1,46,000 equals Rs. 1,49,000.
- She then redoes the math for each of the three earlier years, adding Rs. 1,60,000 to that year's income and computing the additional tax. Across the three years, the additional tax sums to about Rs. 86,000.
- Section 89(1) relief is Rs. 1,49,000 minus Rs. 86,000, that is Rs. 63,000.
- She files Form 10E on the portal in early July 2026, then files her ITR claiming the relief. Her refund of approximately Rs. 63,000 lands within five weeks.
If Kavya had not filed Form 10E, she would have paid the extra Rs. 63,000 with no remedy.
What to do this week
- If you received arrears during FY 2025-26, list out the years they relate to and how much pertains to each year.
- Pull out salary slips or Form 16 for each previous year to recompute taxable income with the arrears notionally added.
- Log in to incometax.gov.in and prepare Form 10E carefully, year by year, before filing your ITR.
- Cross-check that your Form 16 for FY 2025-26 reflects the arrears as taxable salary and the TDS deducted.
- Run the 6-step assessment at https://myfinancial.in to see your old-vs-new regime delta, unused deductions, and insurance gap in under 10 minutes.
FAQ
Can I claim Section 89(1) relief under the new tax regime?
Yes. Section 89(1) relief is available under both old and new regimes for AY 2026-27, but you must compute under the same regime for both the year of receipt and the notional years. The CBDT has clarified the procedure through circulars.
What if I forgot to file Form 10E before my ITR?
The relief will be disallowed in the Section 143(1) intimation. You can then file Form 10E and a rectification under Section 154 within four years. If you missed the original filing window, you may also use ITR-U with limitations.
Do arrears include performance bonuses paid late?
If a bonus relates to a specific previous year but was paid in the current year, it qualifies as arrears. If it is purely a current-year performance bonus paid with a small delay (in the same financial year), it is not treated as arrears.
Does Section 89(1) apply to family pension arrears?
Yes, with adjustments. Family pension is taxed under Income from Other Sources, but Section 89(1) extends to such arrears too. The computation in Form 10E has a separate section for family pension.
Will my employer always apply Section 89(1) automatically?
No. Many employers do not have the capacity to compute multi-year notional tax. They deduct TDS on the gross arrears amount and leave it to you to file Form 10E and claim the relief in your ITR. Check with your payroll team.
Can I claim relief if the arrears relate to a job at a previous employer?
Yes. The relief is tied to the income, not the employer. You can include arrears from any previous employer in Form 10E for the years they pertain to. Keep your old Form 16s as evidence.
How is Form 10E different from Form 12BB?
Form 12BB is a declaration of investment proofs and exemptions submitted to your employer for TDS purposes. Form 10E is a tax form filed on the income tax portal specifically to claim Section 89(1) relief. Both are different and serve different purposes.
Sources
- Income Tax Department, Form 10E filing portal: https://incometax.gov.in/
- Income Tax Rules, Rule 21A on Section 89 relief: https://incometax.gov.in/
- Central Board of Direct Taxes circulars on arrears: https://incometax.gov.in/iec/foportal/
- Finance Ministry, Tax Information Network: https://finmin.nic.in/
This is general information, not personalised advice. For your situation, consult a Certified Financial Planner.
