If salary is received in arrears or in advance, or receives profit in lieu of salary, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1). The relief is also available on family pension received in arrears.
Relief u/s 89 is calculated as follows:
Step 1: Calculate tax for the current year (including cess and education cess) on income including salary in arrears/advance/ compensations.
Step 2: Calculate tax for the current year (including cess and education cess) on income excluding salary in arrears/advance/ compensations.
Step 3: Step1 – step2
Step 4: Calculate tax for the year in which salary/compensation ought to have been received (including cess and education cess) on income including salary in arrears/advance/ compensations.
Step 5: Calculate tax for the year in which salary/compensation ought to have been received (including cess and education cess) on income excluding salary in arrears/advance/ compensations.
Step 6: Step4 – Step5
Step 7: Relief u/s 89 = Step3-step6 (if positive, otherwise nil)
Step 8: Tax paid for Current Assessment year = Step1-step7