7th Pay Commission: In the financial year 2017-18 lakhs of government employees were paid their salaries (including pension) as arrears with retrospective effect. Now, the deadline for filing income tax return (ITR) is near and if you don’t file the return on or before July 31st then you are liable to pay a late fee of Rs 5,000.
The constitution of the Seventh Pay Commission was approved by the government on September 25, 2013, following which recommendations were implemented from Jan 1, 2016. The average 23.55 per cent increase in salary, allowances and pension has been recommended by the 7th Pay Commission.
Salary is taxable on due or receipt basis whichever happens earlier. As a practice, however, salary is taxable on due basis while arrears are taxable on receipt basis, which is the year they are paid to employees.
Considering tax liability increases manifold for the year in which arrears are received, there is some relief provided to government employees under section 89(1) for arrears or advance salary.
According to the section, if a person receives any arrears or advance, then he can claim relief relating to the salary received as provided under Rule 21A of the Income-Tax Rules, 1962. Under the Rule tax liability of two financial years is calculated again- for the year in which arrear is received and the year in which it became due.
How employees who have received arrears under 7th Pay Commission can recalculate their tax liability.
Step 1- Calculate tax liability on the total income (including arrears) in the year it is received.
Step 2- Calculate tax liability on the total income, (excluding arrears) – in the year it is received
Step 3- Calculate the difference between Step 1 and Step 2
Step 4: Calculate tax liability on the total income of the year in which arrears became due (excluding arrears)
Step 5: Calculate tax liability on the total income of the year to which the arrears relate (including arrears).
Step 6: Calculate the difference between Step 4 and Step 5
Step 7: Excess of the amount (Step 3 over Step 6) is the tax relief
If there is any excess tax on arrears, the government employee can claim tax relief. For claiming the relief on account of excess tax paid due to arrears one can fill Form 10E online
To fill the form online go to the income tax department website at https://www.incometaxindiaefiling.gov.in. Click on the ‘e-File’ option and select ‘Income Tax Forms’. Click on ‘Continue’ after selecting Form name, Assessment Year and Submission Mode.
Form 10E contains 5 Annexures applicable to different types of arrears of Income. For example, Annexure I is for salary received in advance or in arrears. Annexure II is for gratuity received for past services for the period of 5 years to 15 years. Similarly, Annexure IV is for commuted pension received.
Annexure 1 is applicable to those seeking relief for 7th Pay Commission arrears. Through the Form 10E you calculate the relief available under Section 89. Once the relief amount is know you can claim it as refund by mentioning it under the Tax Relief Column.