Section 89(1) Tax Relief and Form 10E for Salary Arrears (AY 2026-27)
If you received a back-dated pay revision in FY 2025-26, settled an arrears component from a prior employer, took voluntary retirement, or received commuted pension this year, your tax bill probably looks larger than it should. All of that income is taxed in the year of receipt at the year's slab rates, even though it was earned across multiple prior years. Section 89(1) exists to fix exactly that. The catch: the relief is not automatic.
This guide walks through what Section 89(1) covers, how to compute the relief, and how to file Form 10E correctly for AY 2026-27.
What Section 89(1) Covers
Section 89(1) applies whenever income that economically belongs to past years arrives in the current year and the bunching pushes you into a higher slab. The provision covers:
- Salary received in arrears or in advance, including salary for more than twelve months received in one financial year
- Profits in lieu of salary under Section 17(3), such as gratuity, compensation on termination of employment and commuted pension (Rule 21A sets the method for each)
- Arrears of family pension
Family pension arrears are claimed in the same Form 10E as salary arrears. Note that VRS compensation cannot get both the Section 10(10C) exemption and Section 89 relief for the same payment.
Why Form 10E Comes Before the ITR
Form 10E is not part of the ITR. It is a separate online form, filed on the same e-filing portal, and it must be submitted first. CBDT clarifications and the e-filing portal's own validation rules treat Form 10E as a precondition for the relief. Rule 21AA of the Income Tax Rules requires the particulars for the relief to be furnished in Form 10E. Returns that claim Section 89 relief without a filed Form 10E routinely get the relief withdrawn in the Section 143(1) intimation.
How the Relief Is Calculated
The arithmetic is straightforward. The only thing to watch is which year a given chunk of arrears actually belongs to.
- Compute tax for the current year on total income including the arrears.
- Compute tax for the current year on total income excluding the arrears.
- The difference is A, the extra tax the arrears cause this year.
- For each earlier year the arrears relate to, compute tax on that year's total income with and without its share of the arrears, at that year's rates. Add up the differences to get B.
- Relief = A minus B. If B is equal to or more than A, the relief is nil.
The negative case happens when the arrears, distributed back, would already have fallen into higher slabs in the prior years (because prior-year income was already high). The relief is one-directional: it reduces tax, never increases it.
Worked Example: Asha's Arrears
Asha is salaried in FY 2025-26 (AY 2026-27). In February 2026 her employer pays Rs 2,00,000 of arrears from a back-dated revision: Rs 1,00,000 relates to FY 2023-24 and Rs 1,00,000 to FY 2024-25.
She files under the new tax regime in all three years. Figures below are total income after the standard deduction, and tax includes 4% cess (no surcharge or rebate applies at these incomes).
| Year | Total income without arrears | Tax without arrears | Total income with arrears | Tax with arrears | Extra tax |
|---|---|---|---|---|---|
| FY 2025-26 (current year) | Rs 18,00,000 | Rs 1,66,400 | Rs 20,00,000 | Rs 2,08,000 | A = Rs 41,600 |
| FY 2024-25 | Rs 11,00,000 | Rs 67,600 | Rs 12,00,000 | Rs 83,200 | Rs 15,600 |
| FY 2023-24 | Rs 9,00,000 | Rs 46,800 | Rs 10,00,000 | Rs 62,400 | Rs 15,600 |
| Earlier years total | B = Rs 31,200 |
Relief under Section 89(1) = A minus B = Rs 41,600 minus Rs 31,200 = Rs 10,400.
The arrears would have been taxed at 15% (plus cess) in the earlier years, but they fall in the 20% slab this year, and the relief gives back the difference. The slab rates used are the new regime rates for each year: FY 2025-26 (0 to Rs 4 lakh nil, 5% to Rs 8 lakh, 10% to Rs 12 lakh, 15% to Rs 16 lakh, 20% to Rs 20 lakh), FY 2024-25 (0 to Rs 3 lakh nil, 5% to Rs 7 lakh, 10% to Rs 10 lakh, 15% to Rs 12 lakh) and FY 2023-24 (0 to Rs 3 lakh nil, 5% to Rs 6 lakh, 10% to Rs 9 lakh, 15% to Rs 12 lakh).
Actual rupee figures depend on the slab rates and regime in each year. The portal's Form 10E utility encodes the slab rates for each historical year, so you only enter the prior-year incomes and the arrears split, and the form returns the relief.
Filing Form 10E on the Portal
Pick the right table and annexure first
The form has different tables and annexures for each income type. Use this map:
| Income received | Form 10E annexure |
|---|---|
| Salary or family pension received in arrears or in advance | Annexure I |
| Gratuity | Annexure II or IIA (depending on the length of past service) |
| Compensation on termination of employment | Annexure III |
| Commutation of pension | Annexure IV |
Step-by-step
- Log in to incometax.gov.in/iec/foportal/ with your PAN and password.
- Navigate to e-File → Income Tax Forms → File Income Tax Forms.
- Search for Form 10E and click File Now.
- Select the AY for which you are claiming relief (AY 2026-27 for FY 2025-26 arrears).
- Choose the table and annexure from the map above.
- Enter the year-wise breakup of arrears. Which FY each rupee economically belongs to.
- Enter prior-year total income for each year to which arrears belong.
- The form computes prior-year tax (with and without arrears) using the slab rates encoded for that year. Validate the figures.
- Save and submit. E-verify using Aadhaar OTP, net banking, or DSC.
- Note the acknowledgement number. The portal links Form 10E to your ITR automatically once both are filed under the same PAN and AY, but keep the number for your records.
- Then file your ITR and enter the relief amount in the Section 89 field. It must match Form 10E to the rupee.
Common Mistakes That Disallow the Relief
- Filing the ITR before Form 10E. Rule 21AA requires Form 10E for the relief, and CPC checks for it.
- Relief in the ITR not matching Form 10E. CPC restricts the claim to the Form 10E figure or withdraws it.
- Allocating arrears to the wrong year. Use the employer's revision letter to split the arrears by the year they relate to.
- Wrong prior-year income. Enter the total income actually assessed for each earlier year, from the ITR or intimation.
One more thing that does not qualify: performance bonus, variable pay, ex-gratia, or incentive payments for the current year. They are not arrears even if paid late in the year. Section 89(1) only covers payments that economically belong to a prior year.
When Section 89(1) Is Not Worth Claiming
Two scenarios where the calculation comes out near zero. Skip the form and save the effort:
- Prior-year incomes were already in the highest slab. Adding arrears back would have been taxed at the same rate. Section 89(1) cannot reduce tax in this case.
- The arrears amount is small. A Rs 30,000 back-dated increment spread across two years gives relief in the low thousands. Often not worth the filing effort.
Run the calculation in the portal's Form 10E utility first. Submit only if the output is meaningfully positive.
Pension, Gratuity, VRS, and Termination Cases
The mechanics are the same as salary arrears: file Form 10E first, then the ITR. Use the annexure from the map above: Annexure II or IIA for gratuity, Annexure III for termination compensation, and Annexure IV for commuted pension.
Cross-Links and What to Read Next
If you also have salary income that needs ITR 1, see the ITR 1 Sahaj filing guide for AY 2026-27. For HRA-related disclosures alongside arrears, the HRA exemption calculation guide walks through the three-formula method. For TDS verification before filing, the Form 130 guide explains the new salary TDS certificate that replaces Form 16 from tax year 2026-27 (for FY 2025-26 salary, you still receive Form 16), and the AIS / Form 26AS / TIS guide covers reconciliation. For the broader ITR season framework, see the ITR filing guide for AY 2026-27.
When You Need Professional Help
Section 89(1) relief looks simple on paper but the real-world cases are not. A typical employee receiving a back-dated revision after a settlement does not have prior-year ITR copies handy, has switched between old and new regimes across years, has had income from multiple employers in some years, and is unsure how the arrears split across periods. Getting the calculation right is critical.
Tax Garden's ITR filing service handles Form 10E filing along with the ITR. We file Form 10E before the ITR so the Section 89 relief is claimed in the form the rules require, using the data from your prior-year ITRs and employer's pay-revision letter.
Frequently Asked Questions
Is Section 89(1) relief available under the new tax regime?
Yes. Section 89 relief is not a Chapter VI-A deduction, so it can be claimed whether you file under the old or the new regime. The relief compares tax on the arrears in the year of receipt with tax had they been taxed in the years they relate to, using the slab rates and regime that applied in each of those years.
What happens if I claim Section 89 relief in my ITR without filing Form 10E?
The relief is likely to be disallowed. The e-filing system and CPC treat Form 10E as a precondition, and returns claiming Section 89 relief without it have routinely received intimations under Section 143(1) withdrawing the relief and raising a demand. File Form 10E online first, then enter the same relief amount in your ITR.
Does a performance bonus paid late in the year qualify for Section 89(1) relief?
No. Relief is for salary received in arrears or in advance, meaning pay that relates to an earlier or later year, plus items such as gratuity, compensation on termination and commuted pension. A bonus or incentive for the current year, even if paid after a delay, is not arrears. The employer's revision letter should show which years the arrears relate to.
Do I need my old ITRs to fill Form 10E?
You need the total income of each earlier year to which the arrears relate, because Form 10E recomputes tax for those years with and without the arrears. Prior-year ITR acknowledgements, computations or Form 16 are the easiest sources. The portal applies each year's slab rates, but the income figures you enter must be accurate.
Is it worth filing Form 10E if the arrears are small?
Check the result first. If your income in the earlier years was already in the same or a higher slab, or the arrears are small, the relief may be nil or only a few hundred rupees. Relief never increases your tax, so a nil result simply means there is nothing to claim. Use the Form 10E computation to see the figure before claiming it in the ITR.
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Sources
This guide is verified against Section 89 of the Income Tax Act 1961, the Form 10E user manual on incometax.gov.in/iec/foportal/, the Form 10E FAQ on the e-filing portal, CBDT clarifications on the precondition of Form 10E filing for Section 89 relief, and the slab-rate notifications for FY 2022-23, FY 2023-24, FY 2024-25, and FY 2025-26. Cross-checked against ClearTax, BajajFinserv, Tax2win, and Taxmann coverage of Section 89 and Form 10E as of April 2026. From tax year 2026-27, the same relief continues as Section 157 of the Income Tax Act 2025.
