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Section 89(1) Relief in India: How to Cut Your Tax Bill When You Receive Salary Arrears or Gratuity cover illustration

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Section 89(1) Relief in India: How to Cut Your Tax Bill When You Receive Salary Arrears or Gratuity

Renish Mithani's profile photo Renish Mithani
6 min read
Reviewed by Rahul Godeshwar Last reviewed 8 October 2026 Data verified 8 October 2026
Income Tax Section 89 Salary Arrears Gratuity Tax Relief Form 10E Tax Saving

Salary arrears, gratuity, or a commuted pension received as a lump sum can push your tax rate up sharply — even if that income was earned over several years. Section 89(1) of the Income Tax Act 2025 gives you tax relief in this exact situation. Here is how it works, who qualifies, and how to file Form 10E.

What is Section 89(1) relief?

Section 89(1) is a rebate-and-relief provision under Chapter VIII of the Income Tax Act 2025. When salary, gratuity, commuted pension, leave encashment, or compensation is received in a year other than the one it relates to, the Income Tax Act allows you to claim relief if the tax rate on that lump sum in the receipt year is higher than what it would have been in the year it was earned.

The relief is the difference between the tax on the lump sum in the receipt year and the tax that would have been paid in the year it was earned — but only if the earlier year’s tax was lower. If your income was already in a high bracket in the earlier year, the relief may be zero.

What payments qualify for Section 89(1) relief?

Section 89(1) and Rule 21A of the Income-tax Rules 2026 list five categories of payments that qualify:

Payment type Minimum service condition
Salary received in arrears or in advance None
Gratuity (unexempt portion) At least 5 years of service
Commuted pension (unexempt portion) None
Leave encashment (unexempt portion) None
Compensation on termination of employment At least 3 years of continuous service

Key point: only the unexempt portion qualifies for Section 89(1) relief. If your gratuity is fully exempt under Section 10(10) because you are a government employee or your employer is covered by the Payment of Gratuity Act, no further relief is available — there is no taxable amount. The same applies to commuted pension that is fully exempt under Section 10(10A).

Who can claim Section 89(1) relief?

Section 89(1) is available to individual residents who receive the above payments. It applies under both the old tax regime and the new tax regime. HUFs and companies are not eligible.

You cannot claim relief if the tax in the earlier year (when the money was earned) would have been the same or higher — that is, if the lump sum would have faced the same or a higher tax rate regardless of which year it was taxed in.

How is Section 89(1) relief calculated?

The calculation compares two things:

  1. Tax on the lump sum in the year it is received — computed as if it were your only extra income that year.
  2. Tax on the same lump sum had it been received in the year it actually relates to — computed using the tax slabs of that earlier year.

The relief is: (Tax in receipt year) minus (Tax in earlier year), if the result is positive. If the tax in the earlier year would have been the same or higher, the relief is zero.

Worked example: salary arrears

Arjun is a software engineer in Bangalore. He received a salary arrear of ₹3,00,000 in FY 2026-27 (April 2026 to March 2027) relating to FY 2025-26. His regular annual salary is ₹9,00,000.

Step 1: Calculate tax in the receipt year (FY 2026-27), without the arrear

Total income: ₹9,00,000 Tax under new regime (Section 202, Income Tax Act 2025):

  • Up to ₹4,00,000: nil
  • ₹4,00,001 to ₹8,00,000: 5% of ₹4,00,000 = ₹20,000
  • ₹8,00,001 to ₹9,00,000: 10% of ₹1,00,000 = ₹10,000
  • Total: ₹30,000
  • Add 4% cess: ₹1,200
  • Total tax: ₹31,200

Step 2: Calculate tax in the receipt year with the arrear included

Total income: ₹9,00,000 + ₹3,00,000 = ₹12,00,000 Tax under new regime:

  • Up to ₹4,00,000: nil
  • ₹4,00,001 to ₹8,00,000: 5% of ₹4,00,000 = ₹20,000
  • ₹8,00,001 to ₹12,00,000: 10% of ₹4,00,000 = ₹40,000
  • Total: ₹60,000
  • Add 4% cess: ₹2,400
  • Total tax: ₹62,400

Tax on the arrear in the receipt year: ₹62,400 minus ₹31,200 = ₹31,200

Step 3: Calculate tax for FY 2025-26 had the arrear been received in that year

Total income in FY 2025-26 without the arrear: ₹9,00,000 Tax: ₹31,200 (same calculation as Step 1, same slabs)

Total income in FY 2025-26 with the arrear: ₹12,00,000 Tax: ₹62,400 (same calculation as Step 2)

Tax on the arrear in the earlier year: ₹62,400 minus ₹31,200 = ₹31,200

Step 4: Relief = tax in receipt year minus tax in earlier year

Relief = ₹31,200 minus ₹31,200 = ₹0

In this scenario, the relief is zero because Arjun’s income was already in the 10% slab in FY 2025-26 — the ₹3,00,000 arrear would have faced the same 10% rate in either year. His tax on the ₹3,00,000 arrear is ₹31,200 in both cases.

Now suppose Arjun’s annual salary in FY 2025-26 was only ₹6,00,000. His tax without the arrear in FY 2025-26 would have been:

  • Up to ₹4,00,000: nil
  • ₹4,00,001 to ₹6,00,000: 5% of ₹2,00,000 = ₹10,000
  • Add 4% cess: ₹400
  • Tax: ₹10,400

With the ₹3,00,000 arrear added, his FY 2025-26 income would have been ₹9,00,000 and tax would have been ₹31,200 (same as above). Tax on the arrear in FY 2025-26: ₹31,200 minus ₹10,400 = ₹20,800.

In the receipt year (FY 2026-27), tax on the arrear was ₹31,200. Relief = ₹31,200 minus ₹20,800 = ₹10,400. This ₹10,400 is what Arjun can claim as Section 89(1) relief.

How to claim Section 89(1) relief: Form 10E

Form 10E is the vehicle for claiming Section 89(1) relief. It is mandatory — the Income Tax Department will disallow your relief claim if you file your return without it.

Steps:

  1. Log in to the Income Tax e-filing portal at eportal.incometax.gov.in.
  2. Go to e-File → Income Details → Form 10E (Under Section 89).
  3. Select the relevant assessment year.
  4. Choose the applicable annexure:
    • Annexure I — salary arrears or advance
    • Annexure II — gratuity
    • Annexure III — compensation on termination
    • Annexure IV — commuted pension
  5. Enter the income and tax details for the receipt year and the year to which the payment relates.
  6. Submit Form 10E. The relief amount is auto-computed.
  7. File your ITR for the receipt year, and the relief from Form 10E will be pre-filled in the ITR.

Form 10E must be filed before you file your ITR for the receipt year. You can file it for any assessment year using the e-filing portal.

Common mistakes when claiming Section 89(1) relief

Filing the ITR before Form 10E. The Department will disallow the relief if your ITR is processed before you file Form 10E. File Form 10E first.

Claiming relief on fully exempt payments. If your gratuity is fully exempt under Section 10(10) because your employer is covered by the Payment of Gratuity Act, there is no taxable portion and no Section 89(1) relief is available. Relief applies only to the taxable portion of a payment.

Forgetting that relief can be negative. If your tax in the earlier year would have been the same or higher, relief is zero. Some tax filing software allows you to enter a negative figure — do not treat this as a refund claim.

Using the wrong earlier year. If the arrears relate to more than one previous year, the tax calculation spreads the amount across each relevant year proportionally. Rule 21A(2) governs this — a tax professional can help with multi-year calculations.

Not claiming when you should. Employees who receive salary in arrears (for example, Dearness Allowance arrears paid in one year for previous years) often overpay tax because they do not know Section 89(1) exists. If your tax jumped in a year when you received a lump sum relating to service in an earlier year, check whether relief is available.

Section 89(1) vs. new regime: does it still apply?

Yes. Section 89(1) is available under the new tax regime as well — it is not restricted to the old regime. However, the practical benefit under the new regime is smaller for most salaried employees because the new regime has wider zero-tax slabs and a lower maximum marginal rate of 39% (compared to 42.74% with surcharge in the old regime). Use the calculation above to check whether any relief is actually available before going through the Form 10E process.

Frequently asked questions

Can I claim Section 89(1) relief if I am on the new tax regime?

Yes. Section 89(1) applies to both regimes. Calculate the tax on the lump sum in the receipt year under the new regime and compare it with what the tax would have been in the earlier year under the same regime to find the relief.

What happens if the tax in the earlier year was higher than in the receipt year?

No relief is available. Section 89(1) only provides relief when the lump sum pushes your tax rate upward. If you were already in a higher bracket in the year the money was earned, there is no extra tax burden to relieve.

My employer gave me Form 16 showing the arrear tax. Do I still need Form 10E?

Yes. Form 16 shows the tax your employer deducted on the arrear. Form 10E is the separate claim you file with the Income Tax Department to recover some or all of that tax through Section 89(1) relief. File Form 10E even if your employer has already accounted for Section 89 relief in your Form 16 — the relief in Form 16 may not reflect the full calculation.

Can a pensioner claim Section 89(1) relief on commuted pension?

Yes, on the unexempt portion of commuted pension. If your commuted pension is fully exempt under Section 10(10A), no relief is needed — there is no taxable amount. If only part of it is taxable, Section 89(1) relief applies to that portion only.

Sources

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