Tax Relief for 6CPC Arrears
We are all aware arrears payable on account of implementation Sixth Pay Commission are to be paid in two installments — 40% this year and the rest next year. As per reports, the tax on first installment will be deducted in the current fiscal and that on the second installment will be deducted next year.
Now, when arrears of pay are received in any particular year, it could artificially raise the tax liability in that year. This happens because due to the receipt of arrears, the total income increases and consequently the tax payable increases. However, this is unfair to the taxpayer. Had he originally received the money in the year(s) that he was supposed to receive it, the additional tax would have been staggered over the years instead of converging in one year as a lump sum payment.
Therefore, the law allows a tax deduction under Sec. 89(1) for this additional tax burden and we will be examining the same in detail. Incidentally, this deduction is available to every taxpayer who gets salary in advance or in arrears, whether such person is government employee or is working in the private sector.
Sec. 89(1)
Basically, the relief under Sec. 89(1) is arithmetical. It involves the ascertaining the two amounts of tax – the first is the amount of tax applicable to the total income including the extra amount in the year of receipt. The second is calculating the amount of tax by adding the arrears to the total income of the years to which they relate. The difference between the two amounts is the amount of deduction allowed.
In other words, if the taxpayer is required to pay any additional amount of tax (in the year of receipt) than what he would have otherwise paid, had he received the money in the year(s) that he was supposed to receive it, such additional tax need not be paid i.e., it can be reduced from the tax payable.
Let us take a numerical example to further amplify this issue.
Say Officer A receives Rs. 2 lakh in the current year as arrears of pay. This money was actually pertaining to the year 2006, 2007 and 2008. Now let’s assume that ordinarily, as per his salary level, Vishal would have paid a tax of Rs. 10000. But just because of the inclusion of the Pay arreares this year his tax payable climbs to Rs. 30000.
Now, for a moment let’s go back to the year 2006, and 2007. Officer A had paid a tax of Rs. 10,000 and Rs.11,000 during those years (2006 and 2007) respectively. But had the Year wise pay arrears been paid to him in those years itself, Officer would have paid a higher tax of Rs. 16,000 and Rs,18,000/-. Given this data, let us calculate the tax deduction available to Vishal.
(Note that these figures are hypothetical and meant as an example for ease of understanding – in reality, actual computations will have to be undertaken.)
Year
Particulars
Amt (Rs.)
Amt (Rs.)
2008
Tax payable with arrears
30,000
Tax payable without arrears
10,000
Difference
20,000
2006
Tax payable including Pay arrears
10,000
Tax payable excluding Pay arrears
16,000
Difference
6000
2007
Tax payable including Pay arrears
18,000
Tax payable excluding Pay arrears
11,000
Difference
7,000
Extra tax payable just on account of the arrears (Sec 89(1) deduction)
7,000
Lastly, since it is the extra tax on the arrears that is the relief admissible under Sec. 89(1), it follows that if there is no excess, no relief is admissible. In other words, if the tax in the year of receipt works out to be actually lower than what was payable in the past, no relief under Sec. 89(1) can be claimed.
Now, when arrears of pay are received in any particular year, it could artificially raise the tax liability in that year. This happens because due to the receipt of arrears, the total income increases and consequently the tax payable increases. However, this is unfair to the taxpayer. Had he originally received the money in the year(s) that he was supposed to receive it, the additional tax would have been staggered over the years instead of converging in one year as a lump sum payment.
Therefore, the law allows a tax deduction under Sec. 89(1) for this additional tax burden and we will be examining the same in detail. Incidentally, this deduction is available to every taxpayer who gets salary in advance or in arrears, whether such person is government employee or is working in the private sector.
Sec. 89(1)
Basically, the relief under Sec. 89(1) is arithmetical. It involves the ascertaining the two amounts of tax – the first is the amount of tax applicable to the total income including the extra amount in the year of receipt. The second is calculating the amount of tax by adding the arrears to the total income of the years to which they relate. The difference between the two amounts is the amount of deduction allowed.
In other words, if the taxpayer is required to pay any additional amount of tax (in the year of receipt) than what he would have otherwise paid, had he received the money in the year(s) that he was supposed to receive it, such additional tax need not be paid i.e., it can be reduced from the tax payable.
Let us take a numerical example to further amplify this issue.
Say Officer A receives Rs. 2 lakh in the current year as arrears of pay. This money was actually pertaining to the year 2006, 2007 and 2008. Now let’s assume that ordinarily, as per his salary level, Vishal would have paid a tax of Rs. 10000. But just because of the inclusion of the Pay arreares this year his tax payable climbs to Rs. 30000.
Now, for a moment let’s go back to the year 2006, and 2007. Officer A had paid a tax of Rs. 10,000 and Rs.11,000 during those years (2006 and 2007) respectively. But had the Year wise pay arrears been paid to him in those years itself, Officer would have paid a higher tax of Rs. 16,000 and Rs,18,000/-. Given this data, let us calculate the tax deduction available to Vishal.
(Note that these figures are hypothetical and meant as an example for ease of understanding – in reality, actual computations will have to be undertaken.)
Year
Particulars
Amt (Rs.)
Amt (Rs.)
2008
Tax payable with arrears
30,000
Tax payable without arrears
10,000
Difference
20,000
2006
Tax payable including Pay arrears
10,000
Tax payable excluding Pay arrears
16,000
Difference
6000
2007
Tax payable including Pay arrears
18,000
Tax payable excluding Pay arrears
11,000
Difference
7,000
Extra tax payable just on account of the arrears (Sec 89(1) deduction)
7,000
Lastly, since it is the extra tax on the arrears that is the relief admissible under Sec. 89(1), it follows that if there is no excess, no relief is admissible. In other words, if the tax in the year of receipt works out to be actually lower than what was payable in the past, no relief under Sec. 89(1) can be claimed.
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