Form 10E and Section 89 Relief: Cutting the Tax on Salary Arrears

A pay revision comes through with effect from three years ago, and the arrears arrive as one lump sum. It feels like a windfall right up to the point the tax is computed, because the whole amount is taxed in the year you received it, at the slab rate that lump sum pushes you into, rather than at the lower rates that would have applied had the money come in on time. Section 89 exists precisely to undo that distortion. It is not a deduction and not an exemption: it recomputes the tax as if the arrears had been received in the years they actually related to, and refunds you the difference. The catch is procedural rather than legal, and it is where almost everyone loses the benefit.

What Qualifies for Relief

Section 89 relief is not limited to a pay-revision arrear, though that is the most common case. It covers several situations where income relating to more than one year lands in a single year.

• Arrears of salary received in one year but relating to earlier years, whether from a pay commission, a delayed increment, or a settled dispute
• Salary received in advance for a future period
• Arrears of family pension
• Gratuity received in specified circumstances, where the length of service qualifies
• Compensation on termination of employment, and payments received under a voluntary retirement scheme in specified cases
• Commuted pension received in excess of what is exempt

Relief is available whether you are on the old regime or the new one. Section 89 was not among the concessions withdrawn when the new regime became the default, which surprises a lot of people who assume anything labelled relief must be an old-regime feature. You will find articles claiming the opposite, but the department's own Form 10E utility settles it: the tool computes tax for each year under the regime applicable to that year, using the default new regime for the assessment years since it became the default and the old regime for years before that. If the relief were unavailable under the new regime, the utility would have nothing to compute.

How the Calculation Actually Works

The mechanics are a pair of subtractions. Work out what the arrears cost you in tax in the year you received them, work out what they would have cost in the years they related to, and the relief is the difference between those two figures.

1. Compute the tax on your total income for the year of receipt, including the arrears.
2. Compute the tax on your total income for that same year, excluding the arrears. The difference between these two is the tax the arrears attracted in the year of receipt.
3. Take the earlier year the arrears relate to, and add the arrears attributable to it to that year's total income as originally returned.
4. Compute the tax on that earlier year's income both with and without the arrears added. The difference is what the arrears would have cost had they arrived on time.
5. Relief under Section 89 is the first difference minus the second. Where the arrears span several years, repeat steps three and four for each year and add the results.
6. If the second figure is larger than the first, relief is nil rather than negative. You are never worse off for having done the calculation, but you do not gain either.

A worked example makes it concrete. Take an employee who received ₹3,00,000 of arrears in FY 2025-26, relating entirely to FY 2022-23. Their income for FY 2025-26 excluding the arrears is ₹9,00,000, and their total income for FY 2022-23 as originally returned was ₹6,00,000. Computed under the old regime rates applicable in each of those years:

The ₹20,800 is subtracted from the tax payable for the year of receipt. Two things drive the size of the relief: how far the lump sum pushes you up the slab structure in the receipt year, and how much headroom existed in the earlier year. An employee whose earlier-year income was already in the top slab gets little or nothing, because the arrears would have been taxed at 30% either way. An employee whose earlier-year income sat near a slab boundary can recover a substantial amount.

File Form 10E Before the Return, Not After

This is the part that costs people the relief. Form 10E is mandatory, it is filed online on the e-filing portal, and it must be filed before you submit the return that claims the relief. Claim Section 89 relief in your ITR without a Form 10E already on record and the claim is routinely disallowed when the return is processed, which surfaces as a reduced refund or an outright demand in your Section 143(1) intimation. Nothing about your entitlement changed; only the paperwork order did.

1. Log in to the e-filing portal and go to e-File, then Income Tax Forms, then File Income Tax Forms.
2. Select Form 10E and choose the assessment year corresponding to the year you received the arrears, not the year they relate to.
3. Complete the annexure that matches your situation: the arrears and advance salary annexure is the one most people need, with separate annexures for gratuity, termination compensation, and commuted pension.
4. Enter the earlier year's total income as originally returned, and the arrears attributable to that year. Use the figures from the return you actually filed for that year, not a reconstruction from memory.
5. Submit and e-verify Form 10E, and note the acknowledgement.
6. Only then file your ITR, entering the relief figure in the field for relief under Section 89.

Where People Go Wrong

Beyond filing order, a few errors recur. Selecting the wrong assessment year in Form 10E is the most common: the form belongs to the year of receipt. Using your current estimate of the earlier year's income instead of what was actually returned is the second, and it is the difference the department is most likely to notice, since it holds that earlier return. Government and public sector employees sometimes find their employer has already given the relief while deducting TDS, so it appears in Form 16 and the tax has already been adjusted, but Form 10E still has to be filed online for the claim to survive processing. Nothing needs to be attached to your return itself, and no supporting documents are uploaded with Form 10E either, so keep the arrears breakup letter from your employer and the earlier year's return on file in case a query follows. Finally, if you have already filed and only now realise the form was missing, the position is usually recoverable: file Form 10E and then revise the return if that window is still open, or respond to the demand with the relief working if an intimation has already been issued.