Tax Relief on Salary Arrears: Understanding Section 89 and the New Section 157

Receiving a lump-sum payment of salary arrears, advance salary, or family pension is always a welcome event. However, it often brings a significant tax headache. Because India's income tax system is progressive, receiving income from previous years in a single financial year can push you into a much higher tax bracket, resulting in a disproportionately high tax liability. To address this inequity, tax laws provide a specific relief mechanism. Previously governed by Section 89 of the Income Tax Act, 1961, this computational relief has now transitioned to Section 157 under the new Income Tax Act, 2025.

What is Arrears Relief and How Does it Work?

When salary or pension arrears are received, the tax department allows you to spread this income back to the years in which it was actually earned. By doing so, your tax liability is recalculated as if you had received the income in those respective years. If the recalculated tax is lower than the tax calculated on the lump sum in the year of receipt, the difference is granted as tax relief. This ensures that you are not penalized with a higher tax rate due to delays in payment by your employer or pension provider.

The Structural Transition: Section 89 (1961 Act) to Section 157 (2025 Act)

With the enactment of the new Income Tax Act, 2025 (which came into effect on April 1, 2026), the government has reorganized and renumbered the tax code to make it more concise and easier to navigate. While the core principle of providing tax relief on arrears remains identical, the section numbering has changed. The table below outlines this transition:

Important Note: Under the new Income Tax Act, 2025, Section 89 now refers to the extension of time for acquiring new assets or investing capital gains in cases of compulsory acquisition. If you are claiming relief for salary arrears for the financial year 2026–27 onwards, you must reference Section 157.

Is Relief Available Under the New Tax Regime (Section 115BAC)?

A common point of confusion among taxpayers is whether relief under Section 89 (now Section 157) can be claimed if they opt for the New Tax Regime. While the New Tax Regime (which is now the default regime under Section 115BAC) requires taxpayers to forego major deductions (such as Section 80C, 80D, or HRA), arrears relief is fully allowed under both tax regimes.

This is because Section 89/157 is not a standard deduction or exemption; rather, it is a re-computation mechanism designed to compute the true tax liability by spreading the income over the correct years.

Mandatory Compliance: Filing Form 10E

To claim this relief, there is a mandatory procedural step that you cannot afford to skip: filing Form 10E on the Income Tax e-Filing portal. Here is what you need to know:

• Pre-requisite for ITR: Form 10E must be submitted online before you file your Income Tax Return (ITR).
• Consequences of Non-filing: If you claim the relief in your ITR without submitting Form 10E, the Income Tax Department's automated processing system will disallow the relief and issue a tax demand under Section 143(1).
• Online Submission: The form is filled and submitted directly on the official e-filing portal (under the 'e-File' > 'Income Tax Forms' tab).

Step-by-Step Calculation of Arrears Relief

To calculate the relief under Section 89 (or Section 157), follow these five steps:

1. Calculate the total tax payable on your total income (including the arrears) in the year of receipt.
2. Calculate the tax payable on your total income (excluding the arrears) in the year of receipt. The difference between Step 1 and Step 2 is the tax attributable to the arrears in the year of receipt.
3. For each year to which the arrears relate, calculate the tax payable on the total income including the arrears of that year.
4. For each year to which the arrears relate, calculate the tax payable on the total income excluding the arrears of that year. The difference between Step 3 and Step 4 is the tax attributable to the arrears in the years they were earned.
5. The relief amount is the excess of the tax calculated in Step 2 of the year of receipt over the tax calculated in Step 4 of the respective years (i.e., Tax in Year of Receipt - Tax in Year of Accrual). If the result is negative, no relief is allowed.

Conclusion

Claiming tax relief on salary arrears is a legitimate way to reduce your tax burden, but it requires precise calculations and strict compliance with the filing of Form 10E. With the transition to the Income Tax Act, 2025, ensuring that you reference Section 157 for current periods is essential for accurate filing and avoiding notices.

For expert guidance on calculating arrears relief, filing Form 10E, and navigating transitions under the new Income Tax Act, 2025, reach out to CA Chitransh Vijay at CVSS & Associates.