Relief in respect of Salary received in advance or arrears of past years received

Any income due or received by an employee from his employer or former employer is taxable under the head `salaries’ as per the provisions of the Income Tax Act, 1961. It is pertinent to note that the salary earned in respect of a particular financial year is subject to tax as per the tax rates applicable for that financial year.
There are occasions when an employee may receive income in a particular financial year, which relates to earlier financial years, i.e., as arrears of salary or he may receive certain payments in advance for future financial years, i.e., as advance salary.

In such an event, it is possible that if the entire income is added to the salary income of that financial year, then the tax payer may have to pay tax at a higher rate depending on the slab rates under which his income is otherwise taxable.In such a case, there is a relief provided under the Act to ensure that the employee is not worse off. Email me in case of queries.

What do you mean by Arrears/Advance Salary?

Where a tax payer receives a sum in the nature of salary being paid in arrears or in advance or receives in any financial year salary for more than twelve months or receives profits in lieu of salary or family pension paid in arrears due to which his total income is taxable at a rate more than the rate at which it would otherwise had been taxable then he may claim relief in respect of tax rates. Besides, certain other receipts like gratuity received for past services, compensation received from the employer or former employer on termination of the employment, payment received in commutation of pension, etc are also eligible for the purposes of said relief, subject to certain conditions.
The said relief is to be claimed in the financial year in which the extra payment by way of arrears, advance is taxed. Broadly, the relief under these provisions is arithmetic in nature, as it involves finding out two rates of taxes. The first is the rate of tax applicable to the total income including the extra amount in the year of receipt. Second is finding out the rate by adding the arrears to the total income of the year to which they relate.

Exceptions to tax relief - You cannot claim relief ...

No such relief can be availed in respect of the amount received by the tax payer on his voluntary retirement or termination of service if an exemption in respect of the same has been claimed otherwise by the tax payer under some other provision.

Procedure to be followed for claiming relief

The tax payer is required to furnish the particulars in Form 10E supplied by Income Tax dept. which has annexures for arrears in salary,gratuity etc. fill it up, compute the tax relief going back to your respective financial years return data and tax slab rates and submit to employer fo him to make tax calculations.