Meet Ganesh, an electrical engineer. His first job was with a software company that subsequently wrapped up its operations. Today, he works with another company. Imagine his surprise when he received a salary cheque pertaining to a few months in the financial year 2003-4 from his former employer. The cheque came with a letter saying that Ganesh would also get a small bonus amount soon.
Needless to say, Ganesh is delighted with this windfall. However, he knows that tax might eat into a hefty chunk of this money. And he’s not wrong. Arrears of salary are taxable on payment. Thus, the arrears of salary received by Ganesh are taxable in financial year 2008-9 as income, if not already taxed during the financial year 2003-4.
Similarly, arrears of bonus will be taxed in the year of payment. In other words, in the financial year in which Ganesh receives such a bonus. Thus, if he receives the bonus shortly, such arrears of bonus will also be subject to tax as income during the financial year 2008-9, if not taxed during 2003-4.
What this means is that Ganesh could end up paying a higher tax thanks to the progressively increasing slab rates of tax. A change in the income-tax slab results in a corresponding change in the rate and quantum of income tax and surcharge. This could result in a higher tax incidence. The rate of income tax payable for the year is mandated each year by the Finance Act.
The good news is that Ganesh can find some relief in Section 89, which relates to “Rebates and Relief”. The objective is to mitigate loss resulting from high incidence of tax due to the progressively increasing slab rates. The section provides relief to a salaried person if he receives more than 12 months’ salary in a financial year as either advance salary or past arrears. Relief can be claimed with respect to arrears received if the additional salary results in his being assessed at a higher rate than the rate at which he would have otherwise been assessed. Relief is allowed on the “salary received in arrears” including “arrears of bonus”. Ganesh can opt for such relief.
So how is this calculated? Basically, the relief is arithmetical, based on two rates of tax. The first is the rate of tax applicable to total income including the arrears in the year of receipt, which in this case is the financial year 2008-9. The second is the rate of income tax applicable to total income, including the arrears in the year to which they relate, or 2003-4 in Ganesh’s case.
To claim relief, Ganesh must submit the application with his tax return, along with requisite details. The statement of income of financial year 2003-4 to which the arrears relate should also be submitted. There is also a special facility given to an “employee of a company” for claiming relief, for which Ganesh is eligible. The relief can be worked out and allowed at the time of deduction of tax at source by his present employer. Ganesh will have to provide the particulars of salary and bonus arrears to his present employer in Form 10E.
Preeti Goel is a senior tax professional with Ernst & Young, India
