Section 89(1) provides relief from the higher tax incidence that arises when an employee receives salary in arrears or in advance for an earlier or later year, computed by spreading the lump sum back to the years it relates to.
Section 89(1) of the Income Tax Act, 1961 provides relief to a salaried taxpayer who, because of timing differences, receives salary in arrears or in advance and consequently faces a tax liability higher than what they would have paid if the same amount had been received in the years to which it actually relates. Without Section 89, a lump-sum arrears payment can push the employee into a higher slab rate in the year of receipt, even though the underlying salary was earned over multiple earlier years where the employee may have been in a lower bracket.
The relief works by recomputing the hypothetical tax that would have been paid had the arrears been spread across the years they relate to, and refunding the difference between that hypothetical tax and the actual extra tax in the receipt year. The mechanism applies to several types of compensation — salary arrears, gratuity for long services, termination compensation, commuted pension and family pension arrears — but salary arrears are the most common trigger.
A taxpayer can claim Section 89(1) relief if all the following apply:
If the slab rate in the year of receipt is the same as or lower than the slab rate in the past years, the relief comes out as zero or negative, in which case Section 89 simply does not provide a benefit.
There is no rupee cap on Section 89 relief. The relief equals:
Relief under Section 89(1) = (A) − (B)
Where:
If A > B, the difference is the relief. If B ≥ A, no relief is allowed.
The relief is then deducted from the total tax liability for the year of receipt.
Consider Suresh, a central government employee. In FY 2025-26, he receives ₹6,00,000 as salary arrears for FY 2022-23, FY 2023-24 and FY 2024-25 (₹2,00,000 per year) following a pay commission award. His normal salary in FY 2025-26 is ₹14,00,000.
Step 1 — Tax on receipt year FY 2025-26 (old regime, 30% slab):
Step 2 — Tax on each past year with proportionate arrears:
Step 3 — Section 89 relief:
In this stylised example the slab structure is consistent and the relief is zero. In real cases — where past years had lower slab rates, missing income, or 87A rebate eligibility — the relief is typically meaningful. A common scenario where relief is large: arrears received post-promotion (say at 30% slab) for years when the employee was in the 20% slab.
Section 89(1) is available under both regimes, since it is a relief mechanism rather than a Chapter VI-A deduction. The slab rates used in each step of the computation are those applicable to that year for the regime the taxpayer was on:
| Aspect | Treatment |
|---|---|
| Receipt year (e.g. FY 2025-26) | Use the regime chosen for the receipt year |
| Past years to which arrears relate | Use the regime that was in force for each past year |
| Form 10E filing | Mandatory under both regimes |
The cross-regime case — past years on old regime, receipt year on new regime — is computationally fiddly but valid. Form 10E supports the calculation if filed correctly.
Omnivoo’s payroll engine flags arrears payments at the time of payroll processing and provides a Section 89 relief calculator that splits the arrears across the relevant past years, recomputes hypothetical tax for each year, and produces a ready-to-file Form 10E worksheet. The platform stores the historical year-wise income figures from Form 16 records, so finance teams do not have to chase employees for old payslips. For one-time arrears releases — such as pay commission revisions or settlement payouts — this avoids the typical 6-8 week delay between the arrears payment and the employee filing Form 10E to claim relief.
For a complete walkthrough of salary TDS computation in India, see our TDS on salary guide.
CTC is the total annual expenditure an employer incurs on an employee, including salary, allowances, benefits, and statutory contributions.
Form 16 is an annual TDS certificate issued by an employer to each employee, summarizing salary paid and income tax deducted during the financial year.
The new income tax regime in India (default since AY 2024-25) offers lower slab rates with reduced deductions — only Standard Deduction (₹75,000), employer NPS, and a few others apply.
The old income tax regime in India offers higher slab rates but allows over 70 deductions and exemptions including HRA, LTA, Section 80C, 80D, and home loan interest.
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