Under normal income tax rules, salary is taxable in the year it is received — not the year it was earned. This creates a problem when arrears are paid in a lump sum for multiple previous years. All of it lands in one year’s income, potentially pushing the taxpayer into a higher slab than they would have been in if paid on time.

Consider the difference:

Section 89(1) corrects this by computing what tax would have been if the arrears had been received in the right years, and allowing you to reduce your current tax by that amount.

Section 89(1) relief is available for the following types of receipts:

• Salary arrears relating to previous years
• Advance salary received for future years
• Family pension arrears
• Gratuity received in excess of the exempt limit
• Compensation on termination of employment
• Payment from provident fund (commuted pension)

The calculation follows a specific four-step formula prescribed under Rule 21A of the Income Tax Rules. The relief equals the difference between:

• The additional tax you pay this year because the arrears are bunched into it
• The additional tax you would have paid in the original years if the arrears had been received then

If the current-year additional tax is higher — you get the difference as relief. If it is equal or lower — no relief is available (the lump-sum payment did not actually hurt you tax-wise).

Form 10E is the declaration form through which you provide the year-wise arrears breakdown and the portal calculates your Section 89(1) relief. Filing it is not optional — it is a prerequisite.

Step-by-Step — Filing Form 10E

• 1Login to Income Tax Portal
  Go to incometax.gov.in → Login with PAN → e-File → Income Tax Forms → File Income Tax Forms → Search “Form 10E”
• 2Select Assessment Year
  For FY 2025-26 arrears, select AY 2026-27. This is a common mistake — the AY must match your ITR’s AY exactly.
• 3Select the Correct Table / Annexure
  For salary and family pension arrears — select Table A / Annexure I. Gratuity has a separate table. Selecting the wrong one misroutes the relief calculation.
• 4Enter Year-wise Arrears Details
  For each year the arrear relates to, enter:
  • The arrear amount belonging to that year
  • Your total taxable income for that year (as filed in your ITR)
  • The tax regime you used in that year (old or new)

  The portal then automatically computes the tax with and without the arrear portion for each year.

• 5Verify the Relief Amount and Submit
  The portal displays the calculated relief. Verify it looks reasonable. Submit and e-verify using DSC, Aadhaar OTP, or Net Banking.
• 6Note the Acknowledgement Number
  Save the Form 10E acknowledgement. When filing your ITR, enter this exact relief amount in the Section 89 field — the figure must match Form 10E to the rupee.

Many employees assume their employer handles the Section 89(1) calculation automatically. This is not always true:

• If you submit your Section 89 details to your employer before year-end, some employers include the relief in TDS computation and reflect it in Form 16. This reduces the TDS deducted from your salary.
• Many employers — especially in the private sector — do not compute Section 89 relief at all. They simply deduct TDS on the full arrear amount as current-year income.
• In either case, you must file Form 10E independently on the IT portal and claim the relief in your ITR. The portal’s Form 10E is the authoritative record — not what your employer computed.

If your employer did not account for Section 89 relief and deducted excess TDS as a result, filing Form 10E and claiming the relief in your ITR will generate a refund for the excess TDS.

Employer TDS Issues — Employee Rights and Remedies

This is a nuanced point that trips up many taxpayers:

• Use the tax regime you actually opted for in each respective year — not the regime you wish you had used
• For FY 2025-26 (the year of receipt), use the regime you are opting for this year
• For each prior year the arrear relates to, use the regime you actually filed under in that year
• You cannot switch regimes mid-calculation to maximise relief — the portal will compute based on your actual filed regime for each year

Example 1: Government Employee — Pay Commission Arrears

Sunita is a Central Government employee in Delhi. In FY 2025-26, she received ₹3,60,000 in pay revision arrears relating equally to FY 2022-23, FY 2023-24, and FY 2024-25 (₹1,20,000 each year). Her regular salary was ₹9,40,000. She files under the old regime.

With arrears, her income hits ₹13,00,000 — squarely in the 30% slab for a portion. Without arrears in each earlier year, the ₹1,20,000 would have been taxed at lower marginal rates. Her Form 10E calculation shows relief of approximately ₹18,000. She files Form 10E first, then claims it in ITR-1.

Example 2: Private Sector Employee — Employer Did Not Account for Relief

Vikash works at a private firm in Noida. His employer paid ₹1,80,000 in salary revision arrears for FY 2023-24 and FY 2024-25 (₹90,000 each year). The payroll team deducted TDS on the full ₹1,80,000 as current income. Vikash’s Form 10E calculation shows ₹9,000 relief.

He files Form 10E online before his ITR, claims ₹9,000 relief in ITR-2, and receives a refund of the excess TDS. His employer’s Form 16 does not show the relief — but that does not matter. The portal’s Form 10E is what counts.

Example 3: Pensioner — Family Pension Arrears

Mrs. Gupta, a 68-year-old pensioner, received ₹96,000 in pending family pension arrears for two prior years (₹48,000 each). Even though she pays minimal tax at her income level, Section 89(1) may still provide relief if the lump sum pushed her past the basic exemption limit in the current year while she would have been below it in the prior years. She files Form 10E — the portal computes zero relief in this case since the prior-year income was also above the exemption limit. No harm done; she confirms no relief is available and files the ITR accordingly.

Mistake 1 — Claiming relief in ITR without filing Form 10E first:
This is the most common and consequential error. The result is a defective return notice under Section 139(9). File Form 10E first, always — even if it is just a formality and the relief turns out to be zero.

Mistake 2 — Selecting the wrong Assessment Year on Form 10E:
For FY 2025-26 arrears, select AY 2026-27 on Form 10E. The AY on Form 10E and ITR must match exactly. A mismatch between the two will cause a processing error or notice.

Mistake 3 — Selecting the wrong table in Form 10E:
Salary arrears go into Table A / Annexure I. Gratuity goes into a different table. Commuted pension has its own section. Using the wrong table routes the calculation incorrectly and produces a wrong relief figure.

Mistake 4 — Including current-year bonuses as arrears:
A performance bonus decided and paid in FY 2025-26, even if late, is current-year income. It does not qualify for Section 89(1). Only income that economically belongs to a prior period qualifies.

Mistake 5 — Using the wrong tax regime for prior years:
Form 10E requires the regime used in each prior year’s ITR. If you were on the new regime in FY 2023-24, you cannot run the Form 10E calculation using the old regime for that year.
Rectification Under Section 154 — Fix Tax Errors After Filing