In Seventh Pay Commission bonanza, lakhs of central government employees will soon receive higher salaries and arrears in one go. This may result in an increase in the tax slab of many employees as they will receive arrears from January 1, 2016.
There are provisions which provide tax relief to employees due to delay in the receipt of the arrears.
"If an employee or his family receives pension arrears or salary arrears, he or she can claim tax relief under Section 89(1). This Section makes sure you don't end up paying higher tax due to moving up a tax slab from receipt of arrears. Or because tax slab rates in the year of receipt are higher as compared to the year to which arrears belong to," says Preeti Khurana, chief editor of Cleartax portal.
How the tax relief is calculated
The tax break is arrived at by recalculating the tax for the both the years in which the arrears are received and the year to which arrears pertain to.
1) Calculate the tax payable on the total salary including and excluding the arrears in the year in which it is received. Calculate the difference between the two and assume it is 'A'
2) Calculate the tax payable on the total salary including and excluding the arrears for every year for which the arrear relates to and sum it up. Calculate the difference between the two and assume it as 'B'.
3) If 'A' is more than 'B', the employee will get tax break equivalent to 'A'.
How it can be claimed
To avail the tax break, it is mandatory under the income tax laws to file Form 10E. The form includes details like the PAN, arrear and advance salary details. This form has to be uploaded on the website of the Income Tax Department.