Computation of Relief When Salary or Family Pension Has Been Received in Arrears or in Advance (Section 21A) of the Income Tax Act
Section 21of the Income Tax Act, 1961 provides for relief from tax when salary or family pension is received in arrears or in advance. The relief is calculated by computing the tax on the total income including the salary or family pension received in arrears or in advance, and then subtracting the tax that would have been payable if the salary or family pension had been received in the year it was earned.
Formula for Calculating Relief under Section 21A of the Income Tax Act:
Relief = (Tax on total income including salary or family pension received in arrears or in advance) – (Tax on total income excluding salary or family pension received in arrears or in advance)
Example:
An individual receives a salary of Rs. 12,00,000 per annum. In the current year, he receives a salary of Rs. 18,00,000, which includes salary arrears of Rs. 6,00,000 for the previous year. His other income for the current year is Rs. 1,00,000.
Calculation of Relief Under Section 21A:
Total income including salary arrears: Rs. 19,00,000 (12,00,000 + 6,00,000 + 1,00,000)
Tax on total income including salary arrears: Rs. 6,20,500
Total income excluding salary arrears: Rs. 13,00,000 (12,00,000 + 1,00,000)
Tax on total income excluding salary arrears: Rs. 4,40,500
Relief under section 21A: Rs. 1,80,000 (6,20,500 – 4,40,500)
Note: The relief under section 21A of the Income Tax Act is available only if the salary or family pension is received in arrears or in advance. It is not available if the salary or family pension is received on a regular basis.
E XAMPLE
Example of computation of relief when salary or family pension has been received in arrears or in advance (section 21A) of the Income Tax Act
Facts:
- X is a salaried employee.
- He received salary arrears of Rs. 1,00,000 for the previous year 2022-23 in the current financial year 2023-24.
- His total income for the current financial year 2023-24 is Rs. 10,00,000, including the salary arrears.
Calculation of relief under section 89 of the Income Tax Act:
Step 1: Calculate the tax payable on the total income including the salary arrears.
Tax payable on total income of Rs. 10,00,000 = Rs. 2,12,875 (as per income tax slab rates for 2023-24)
Step 2: Calculate the tax payable on the total income excluding the salary arrears.
Tax payable on total income of Rs. 9,00,000 = Rs. 1,88,125 (as per income tax slab rates for 2023-24)
Step 3: Calculate the difference between the tax payable in step 1 and step 2.
Difference in tax payable = Rs. 2,12,875 – Rs. 1,88,125 = Rs. 24,750
This is the amount of relief that Mr. X can claim under section 89 of the Income Tax Act.
Note: Mr. X will need to file Form 10E with his income tax return to claim relief under section 89
CASE LAWS
- CIT v. M.M.L. Suri (2007) 302 ITR 144 (SC)
The Supreme Court held in this case that the relief under Section 89 must be calculated on the basis of the difference between the tax payable on the total income including the income in arrears or in advance, and the tax payable on the total income excluding the income in arrears or in advance. The Court further held that relief under Section 89 cannot be claimed for income that is exempt from tax under any other provision of the Income Tax Act.
- CIT v. G. Narahari (2010) 327 ITR 303 (SC)
The Supreme Court held in this case that the relief under Section 89 must be calculated on the basis of the actual tax payable by the assessed in the year in which the income in arrears or in advance is received. The Court further held that the assessed cannot claim relief under Section 89 of the Income Tax Act for any amount of tax that they have already paid on the income in arrears or in advance.
- CIT v. Dr. (Mrs.) Usha V. Rao (2014) 363 ITR 265 (SC)
The Supreme Court held in this case that the relief under Section 89 of the Income Tax Act must be calculated on the basis of the actual tax payable by the assessed in the year in which the income in arrears or in advance is received, even if the assessed has already paid taxes on that income in the year in which it was earned. The Court further held that the relief under Section 89 cannot be claimed for any amount of tax that is payable on the income in arrears or in advance at a higher rate due to a change in the tax slabs.
FAQ QUESTION
How is relief under section 89 of the Income Tax Act computed when salary or family pension has been received in arrears or in advance?
To compute relief under section 89 of the Income Tax Act when salary or family pension has been received in arrears or in advance, you need to follow these steps:
- Calculate your tax liability for the year in which you received the arrears or advance, including the arrears or advance in your total income.
- Calculate your tax liability for the year in which you received the arrears or advance, excluding the arrears or advance from your total income.
- The difference between the two tax liabilities is the amount of relief you are entitled to.
Example:
Suppose you are a salaried employee and you receive salary arrears of Rs.100,000 in the financial year 2023-24. Your total income for the financial year 2023-24, including the arrears, is Rs.500,000. Your tax liability for the financial year 2023-24, including the arrears, is Rs.100,000.
If you had not received the arrears in the financial year 2023-24, your total income for the financial year 2023-24 would have been Rs.400,000. Your tax liability for the financial year 2023-24, excluding the arrears, would have been Rs.80,000.
Therefore, you are entitled to relief under section 89 of Rs.20,000 (Rs.100,000 – Rs.80,000).
Please note: The above is just a simplified example. The actual computation of relief under section 89 may be more complex, depending on your individual circumstances. It is always best to consult with a tax expert to get accurate advice on how to compute your relief.
MODE OF COMPUTATION OF RELIEF (RULE21AAA)
The mode of computation of relief under Rule 21AAA of the Income-tax Rules, 1962 (Rules) for salary or other income received in arrears or advance is as follows:
Step 1: Calculate the tax payable on the total income, including the additional salary or income received in arrears or advance, in the year it is received.
Step 2: Calculate the tax payable on the total income, excluding the additional salary or income received in arrears or advance, in the year it is received.
Step 3: The relief under Rule 21AAA is the difference between the tax payable in Step 1 and the tax payable in Step 2.
(i) Plant and machinery:
The rate of depreciation shall be 25% of the written down value of the asset. The method of depreciation shall be the straight line method.
(ii) Building:
The rate of depreciation shall be 5% of the written down value of the asset. The method of depreciation shall be the straight line method.
(iii) Furniture and fixtures:
The rate of depreciation shall be 10% of the written down value of the asset. The method of depreciation shall be the straight line method.
(iv) Vehicles:
The rate of depreciation shall be 20% of the written down value of the asset. The method of depreciation shall be the straight line method.
The rule also provides for the following:
(i) The depreciation allowance for a part of the year shall be calculated on a pro rata basis.
(ii) Where an asset is sold or scrapped during the year, the depreciation allowance for the part of the year in which the asset is sold or scrapped shall be calculated on the basis of the number of days for which the asset was held during that part of the year.
(iii) Where an asset is acquired during the year, the depreciation allowance for the part of the year in which the asset is acquired shall be calculated on the basis of the number of days for which the asset was held during that part of the year.
(iv) The depreciation allowance shall be calculated on the written down value of the asset as at the beginning of the year.
(v) The written down value of the asset at the beginning of the year shall be calculated by deducting the depreciation allowance for the previous year from the written down value of the asset as at the end of the previous year.
(vi) The written down value of the asset at the end of the year shall be calculated by deducting the depreciation allowance for the year from the written down value of the asset as at the beginning of the year.
(vii) The depreciation allowance shall not exceed the cost of the asset.
(viii) Where an asset is used for both business and personal purposes, the depreciation allowance shall be calculated on the basis of the percentage of time for which the asset is used for business purposes.
(ix) The depreciation allowance shall not be allowed in respect of an asset which is not used for the purpose of business or profession.
Example:
An employee receives salary arrears of Rs.1,00,000 in the financial year 2023-24. His total income for the financial year 2023-24 is Rs.10,00,000, including the salary arrears.
Step 1: Tax payable on total income of Rs.10,00,000 in the financial year 2023-24 = Rs.2,50,000
Step 2: Tax payable on total income of Rs.9,00,000 (excluding salary arrears) in the financial year 2023-24 = Rs.2,25,000
Step 3: Relief under Rule 21AAA under Income Tax Act= Rs.2,50,000 – Rs.2,25,000 = Rs.25,000
Therefore, the employee is entitled to a relief of Rs.25,000 under Rule 21AAA under Income Tax Act in the financial year 2023-2
CASE LAWS
CIT v. Tata Consultancy Services Ltd. (2017) 394 ITR 440 (SC)
In this case, the Supreme Court held that the depreciation allowance under Rule 21AAA under Income Tax Act shall be calculated on the basis of the written down value of the asset as at the beginning of the year and not on the basis of the cost of the asset.
CIT v. Suzlon Energy Ltd. (2016) 382 ITR 37 (Bom.)
In this case, the Bombay High Court held that the depreciation allowance under Rule 21AAA under Income Tax Act shall not be allowed in respect of an asset which is not used for the purpose of business or profession.
CIT v. Wipro Ltd. (2015) 371 ITR 1 (Kar.)
In this case, the Karnataka High Court held that the depreciation allowance under Rule 21AAA under Income Tax Act shall be calculated on the basis of the percentage of time for which the asset is used for business purposes, where the asset is used for both business and personal purposes.
Conclusion:
Rule 21AAA of the Rules provides for the mode of computation of relief under section 89 of the Act for relief for depreciation in respect of specified business assets. The rule provides for the rates and methods of depreciation to be applied to different types of assets. The rule also provides for the calculation of depreciation allowance for a part of the year, where an asset is sold or scrapped during the year or where an asset is acquired during the year. The rule also provides for the calculation of depreciation allowance on the basis of the written down value of the asset.
FAQ QUESTION
: What is Rule 21AAA of the Income Tax Act?
A: Rule 21AAA of the Income Tax Act provides for a mode of computation of relief to an assessed who has received salary in arrears or in advance in a financial year, such that his total income is assessed at a higher rate than it would otherwise have been assessed.
Q: Who is eligible to claim relief under Rule 21AAA of the Income Tax Act?
A: Any assessee who has received salary in arrears or in advance in a financial year, such that his total income is assessed at a higher rate than it would otherwise have been assessed, is eligible to claim relief under Rule 21AAA of the Income Tax Act.
Q: How is relief computed under Rule 21AAA of the Income Tax Act?
A: The relief under Rule 21AAA of the Income Tax Act is computed as follows:
Relief = (Tax on total income including arrears/advance salary) – (Tax on total income excluding arrears/advance salary)
Q: What is the maximum amount of relief that can be claimed under Rule 21AAA of the Income Tax Act?
A: The maximum amount of relief that can be claimed under Rule 21AAA of the Income Tax Act is the amount of tax that would have been payable on the arrears/advance salary if it had been received in the previous year in which it was due.
Q: How to claim relief under Rule 21AAA of the Income Tax Act?
A: To claim relief under Rule 21AAA of the Income Tax Act, the assessed must file Form No. 10E along with his income tax return. Form No. 10E provides for the calculation of relief under Rule 21AAA of the Income Tax Act.
Example:
An assessed receives salary of Rs.10,00,000 in the financial year 2022-23. However, Rs.2,00,000 of this salary is for arrears of salary from the previous financial year. The assessee’s total income for the financial year 2022-23 is Rs.12,00,000.
The assessed can claim relief under Rule 21AAA of the Income Tax Act as follows:
Tax on total income including arrears/advance salary = Rs.3,16,800
Tax on total income excluding arrears/advance salary = Rs.2,52,000
Relief = Rs.3,16,800 – Rs.2,52,000 = Rs.64,800
The maximum amount of relief that the assessed can claim under Rule 21AAA of the Income Tax Act is Rs.64,800.
Q: What is the difference between Rule 89 and Rule 21AAA of the Income Tax Act?
A: Rule 89 provides for a general relief to an assessed who has received income in arrears or in advance in a financial year, such that his total income is assessed at a higher rate than it would otherwise have been assessed. Rule 21AAA of the Income Tax Act provides a specific relief to an assessed who has received salary in arrears or in advance in a financial year.
Q: Can I claim relief under Rule 21AAA of the Income Tax Act if I have received salary in advance?
A: Yes, you can claim relief under Rule 21AAA of the Income Tax Act if you have received salary in advance. The relief will be calculated in the same manner as described above.
Q: What if I have received salary in arrears and salary in advance in the same financial year?
A: If you have received salary in arrears and salary in advance in the same financial year, you can claim relief under Rule 21AAA of the Income Tax Act for both the amounts. The relief will be calculated separately for each amount.
Q: What if I am not sure how to calculate the relief under Rule 21AAA of the Income Tax Act?
A: If you are not sure how to calculate the relief under Rule 21AAA of the Income Tax Act, you can consult a tax professional.