Salary arrears can create an artificial tax spike because income relating to earlier years is received in one year and taxed at the rates applicable to that year. Income-tax relief is designed to reduce the additional burden caused by this bunching. For Tax Year 2026-27 onward, section 157 of the Income Tax Act, 2025 provides the relief framework and the prescribed filing is Form 39.
The Income Tax Department's Income Tax Forms FAQ confirms that Form 39 replaces Form 10E for relief claimed under the Income Tax Act, 2025. It also makes an important transition distinction: relief relating to AY 2026-27 under the Income-tax Act, 1961 continues to use Form 10E, while Form 39 applies from Tax Year 2026-27.
What problem does salary-arrears relief solve?
Income-tax rates are progressive. If salary belonging economically to earlier periods is paid in a lump sum in a later year, adding the whole amount to the later year's income can push part of it into a higher tax band. Relief does not make the arrears tax-free. Instead, it is intended to neutralise the extra tax attributable to bunching eligible income into one year.
The Department says section 157 covers salary received in advance or arrears and also specified receipts such as gratuity, retrenchment compensation and commutation of pension. Form 39 contains structured computation tables for the relevant receipt categories.
Form 39 or Form 10E: which one applies?
The governing year is the first decision. For FY 2025-26 corresponding to AY 2026-27, taxability remains under the Income-tax Act, 1961 and the Department says Form 10E continues to be used for section 89 relief. For Tax Year 2026-27 under the Income Tax Act, 2025, the corresponding relief is claimed under section 157 through Form 39.
This distinction matters during the transition because both old and new forms can remain relevant on the portal for different years. Selecting a form based only on the date on which the taxpayer logs in can therefore produce the wrong result.
How does the relief calculation work conceptually?
The calculation compares the tax effect of including the eligible arrears or advance in the year of receipt with the tax effect that would have arisen had the income been taxed in the year or years to which it relates. The relief is aimed at the excess tax caused by bunching, not at the gross arrear amount itself.
Form 39 improves the process by using uniform computation tables for additional salary, gratuity, pension and other eligible receipts, with system-based validation and auto-populated relief features described by the Department.
Simple worked illustration
Assume an employee receives ₹3,00,000 of eligible salary arrears in Tax Year 2026-27, of which ₹1,50,000 relates to each of two earlier periods. The employee should not simply claim ₹3,00,000 as a deduction. The relief working compares the additional tax created by adding ₹3,00,000 to the current year's income with the additional tax that would have arisen if the respective ₹1,50,000 amounts had been included in the relevant earlier years. The eligible difference, if positive under the prescribed computation, is the relief.
The exact result depends on the taxpayer's income, deductions, applicable regime and rates for each relevant year. That is why prior-year income and tax figures are essential inputs rather than optional background information.
What information should be collected before filing?
- Employer arrears statement: obtain a year-wise breakup showing which period the additional salary relates to.
- Current-year salary records: reconcile the arrears to payslips, Form 16 and payroll records.
- Earlier-year income details: preserve the returns, computations and salary information for each year to which the arrears relate.
- Tax-regime information: use the regime and tax treatment applicable to each relevant year rather than applying one current-year assumption everywhere.
- Receipt classification: identify whether the amount is salary arrears, advance salary, gratuity, retrenchment compensation or commuted pension because the form uses structured categories.
How is Form 39 different from old Form 10E?
The Department says Form 39 has two broad parts: Part A for taxpayer and tax-year details, and Part B for the relevant receipts and computation. Compared with Form 10E, the new form uses more structured computation tables, auto-population, validations, standardised inputs and database integration intended to reduce repeated entry and calculation errors.
For historical context, the Department's Form 10E user manual explains the old online workflow and the receipt categories for which section 89 relief could be claimed. That manual remains relevant when dealing with an assessment year governed by the 1961 Act, but it should not be used to assume that Form 10E is the correct form for Tax Year 2026-27.
When should Form 39 be filed?
The Department's current FAQ states that Form 39 is to be filed on or before the due date specified under section 263(1)(c) of the Income Tax Act, 2025 for claiming the relief. Taxpayers should therefore build the form into the return-preparation timeline rather than discover it only after submitting the return.
Practical filing framework
- Identify the governing year: decide whether the claim belongs to AY 2026-27 under the 1961 Act or Tax Year 2026-27 onward under the 2025 Act.
- Obtain a year-wise arrears breakup: do not rely on a single lump-sum payroll figure.
- Reconstruct earlier-year tax data: use filed returns and computations wherever available.
- Classify the receipt correctly: salary arrears and the other eligible receipt categories should go into the appropriate structured computation.
- Reconcile the relief with the return: the relief claimed in the income-tax return should agree with the prescribed form and supporting working.
- Retain evidence: preserve the filed form acknowledgement, employer statement and year-wise computation.
Common mistakes to avoid
- Using Form 10E for Tax Year 2026-27 merely because it was used in earlier years.
- Treating salary arrears as tax-free instead of calculating relief on the additional tax burden.
- Using only current-year income and ignoring the earlier years to which arrears relate.
- Failing to reconcile the employer's arrears breakup with Form 16 and payroll records.
- Waiting until after the return is filed to investigate the prescribed relief form.
Practical takeaway
Relief for salary arrears is a tax-equalisation mechanism for bunching, not an exemption from tax. For Tax Year 2026-27 onward, the Income Tax Act, 2025 uses section 157 and Form 39; AY 2026-27 under the old Act still uses Form 10E. Start with the correct governing year, obtain a year-wise arrears breakup, reconstruct the relevant tax computations and make sure the relief in the return matches the prescribed form.
