Published 21 October 2026
A pay revision granted with effect from an earlier date, a bonus held back for two years, or family pension released after a long delay all arrive in one year’s salary. Arrears are taxed in the year they are received, so the lump sum can push that year’s income into a higher slab, or out of the rebate altogether. The law gives relief for the extra tax. It does so by comparing the tax on the arrears this year with the tax they would have attracted in the years they belong to. The relief is not automatic. It depends on a form, Form 10E under the 1961 Act and Form No. 39 under the Income-tax Rules, 2026. Under the 2026 Rules that form now has a deadline. This guide explains the relief, the computation and the form.
Which Act governs which year
- Financial year 2025-26 (assessment year 2026-27) and earlier. Relief is granted under section 89 of the Income-tax Act, 1961. It is computed under rule 21A of the Income-tax Rules, 1962, and claimed in Form No. 10E under rule 21AA.
- Tax year 2026-27 onwards. Relief is granted under section 157 of the Income-tax Act, 2025. It is computed under rule 73 of the Income-tax Rules, 2026 and claimed in Form No. 39 under rule 73(3).
- Arrears received in FY 2025-26 are dealt with under the 1961 Act, even where they relate to years before that. Arrears received on or after 1 April 2026 are dealt with under the 2025 Act, even where they relate to years governed by the 1961 Act. Earlier proceedings continue under the 1961 Act by section 536(2).
Why arrears are taxed in the year of receipt
Section 15© of the 1961 Act charges “any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer … if not charged to income-tax for any previous year”. Section 15(1)© of the 2025 Act does the same for the tax year. Arrears are therefore income of the year they are paid, not of the year they relate to. Section 89 and section 157 do not move the income. They reduce the tax.
What the relief covers
Section 89 gives relief where total income “is assessed at a rate higher than that at which it would otherwise have been assessed” because the assessee receives any of the following:
- salary paid in arrears or in advance;
- salary for more than twelve months in one financial year;
- a payment that is a profit in lieu of salary under section 17(3); or
- family pension paid in arrears.
The Assessing Officer “shall, on an application made to him in this behalf, grant such relief as may be prescribed”.
Section 157(1) of the 2025 Act lists the same four receipts:
- arrears or advance salary;
- salary for more than twelve months in one tax year;
- profits in lieu of salary under section 18(1); and
- arrears of family pension as defined in section 93(1)(d).
The relief is granted “on an application made to him by the assessee”.
There is one exclusion. The proviso to section 89 bars relief on an amount received on voluntary retirement or separation if an exemption under section 10(10C) has been claimed “in respect of such, or any other, assessment year”. Section 157(2) of the 2025 Act bars relief on income for which the deduction in section 19(1), serial number 12, has been claimed “for such, or any other, tax year”. The bar also runs the other way. The third proviso to section 10(10C), and section 19(2)(e)(iii), deny the voluntary retirement benefit to someone who has had relief on the same amount. The choice between them is covered in Gratuity, Leave Encashment and Retirement Receipts.
How the relief is computed for arrears
Rule 21A(2) of the 1962 Rules and serial number 1 of the Table in rule 73(1) of the 2026 Rules use the same method.
- Tax on the arrears this year (A). Tax on this year’s total income, less tax on that income with the arrears taken out.
- Tax on the arrears in their own years (B). For each earlier year the arrears relate to, tax on that year’s total income with its share of arrears added, less tax on that year’s income as it stood. The results are added together.
- Relief = A − B, if A exceeds B. If the arrears would have cost more in the earlier years, there is no relief.
Rule 73 writes this as Relief = A − B, with A = C − D and B = the aggregate of E = F − G. Each earlier year’s tax is worked out with the rates, rebate and regime that applied to that year.
A worked example, before cess. In FY 2025-26 an employee receives Rs 3,00,000 of arrears relating to FY 2023-24. Both years are in the new regime.
| Step | Figure |
|---|---|
| FY 2025-26 total income including arrears | Rs 18,00,000 |
| Tax on it at AY 2026-27 rates | Rs 1,60,000 |
| Total income without the arrears | Rs 15,00,000 |
| Tax on that | Rs 1,05,000 |
| A: tax on arrears this year | Rs 55,000 |
| FY 2023-24 total income as returned | Rs 9,00,000 |
| Tax on it at AY 2024-25 rates | Rs 45,000 |
| FY 2023-24 income with the arrears added | Rs 12,00,000 |
| Tax on that | Rs 90,000 |
| B: tax on arrears in their own year | Rs 45,000 |
| Relief (A − B) | Rs 10,000 |
The AY 2024-25 figures use clause (i) of section 115BAC(1A): nil to Rs 3,00,000, then 5, 10, 15, 20 and 30 per cent. At Rs 9,00,000 and Rs 12,00,000 neither year qualifies for the section 87A rebate as it stood for AY 2024-25.
The other receipts in rule 21A and rule 73
| Receipt | Method | 1962 Rules | 2026 Rules |
|---|---|---|---|
| Gratuity for past service of 5 to 15 years | Tax at this year’s average rate, less tax at the average of the two preceding years’ average rates, each recomputed with half the gratuity added | Rule 21A(3)(b) | Rule 73(1), serial number 2 |
| Gratuity for past service of 15 years or more | Same, over three preceding years with one-third added to each | Rule 21A(3)© | Rule 73(1), serial number 3 |
| Compensation on termination after at least 3 years’ continuous service, with at least 3 years of the term unexpired | Same, over three preceding years | Rule 21A(4) | Rule 73(1), serial number 4 |
| Commutation of pension | Same, over three preceding years | Rule 21A(5) | Rule 73(1), serial number 5 |
| Any other receipt | Relief as the Board deems fit | Rule 21A(6) | Rule 73(2) |
The form: Form 10E, now Form No. 39
Under the 1961 Act, rule 21AA of the 1962 Rules prescribes Form No. 10E for the particulars of a claim under section 89(1). The e-filing portal’s user manual for Form 10E states that “It is mandatory to file Form 10E to claim a tax relief on arrear/advance income under Salary”, and that “It is advisable that Form 10E is filed before filing Income Tax Return”. The manual lists the parts of the form:
- Annexure I: salary or family pension in arrears or in advance;
- Annexures II and IIA: gratuity for past services;
- Annexure III: compensation on termination of employment; and
- Annexure IV: commutation of pension.
The manual’s path is e-File, then Income Tax Forms, then File Income Tax Forms, then Form 10E, choosing the assessment year. The form is submitted online and e-verified, and an acknowledgement is sent to the registered e-mail and mobile number.
Under the 2025 Act, rule 73(3) of the 2026 Rules says: “To claim relief under section 157(1), the assessee shall furnish the particulars specified in Form No. 39 on or before the due date specified under section 263(1)©.” That is a time limit in the rule itself. It is the return due date for the tax year, 31 July for most salaried individuals under the Table in section 263(1)©. The 1962 Rules contain no equivalent date. On the words of rule 73(3), from tax year 2026-27 onwards Form No. 39 must be in by that date, whether or not the return itself is filed in time.
Relief through the employer
A Government servant, or an employee of a company, co-operative society, local authority, university, institution, association or body, may give the particulars to the employer. The employer then computes the relief and reduces the tax deducted. This is section 192(2A) of the 1961 Act, and rule 21AA of the 1962 Rules provides for Form 10E to be furnished to the employer. The 2025 Act counterparts are section 392(4)(a)(ii) and rule 73(4) of the 2026 Rules, which provides for Form No. 39 to be furnished to the employer.
Relief given by the employer appears in Form 16. The relief is still claimed in the return, and the form is still filed on the portal.
When the relief is refused at processing
A return that claims relief without the form on record is usually processed without it, and the difference shows as a demand in the intimation. The intimation is described in The Intimation under Section 143(1). Correction of an intimation is described in Rectification of Mistakes: Section 154.
What to have ready
- The employer’s arrears statement, showing the amount and the years it relates to. Form 16 usually shows the arrears as part of salary.
- The returns, or computations, for each earlier year the arrears relate to: total income, the regime used and the tax payable.
- This year’s computation, with and without the arrears.
- For gratuity, compensation or commutation: the years of service, the date of termination and the term unexpired, and the total income of the two or three preceding years.
- Confirmation that no voluntary retirement exemption or deduction has been claimed on the same amount, in any year.
- The due date, because under the 2026 Rules Form No. 39 must be in by then.
In order
- The arrears are included in the salary of the year they are received.
- Tax on the arrears is computed this year (A) and in the years they relate to (B), each at that year’s rates.
- Form 10E (to AY 2026-27) or Form No. 39 (from tax year 2026-27) is filed on the portal and e-verified. From tax year 2026-27 it must be filed by the return due date.
- The return claims relief of A − B. Government and other listed employees may have had the relief applied by the employer already.
- If processing drops the relief, the intimation is checked against the form on record and corrected through rectification.
The next guide, Gratuity, Leave Encashment and Retirement Receipts, deals with the lump sums paid when employment ends.