Often there may be a situation where salary of an assessee may be in arrears. Since, this the salary remains unpaid, there is no income tax liability on that particular financial year. However, when it is received in future, the same salary in arrears become a taxable income in the hands of the assessee. Similarly advance salary received becomes taxable income for the current financial year. Under these circumstances, it may be quite possible that there might be change in the tax rates and this change in tax rate may result in taxes being paid at higher rates. So to offset the burden of salaried taxpayers who can be subject to taxes at higher rates on account of receiving such arrears or advance salary, this section provides relief to aggrieved assessees.
Such assessee can make application to the Assessing Officer and upon such application, the Assessing Officer can grant relief as provided in this section and rules issued pursuant to this section. The tax will be calculated in the following manner –
- Such arrear salary received or advance received shall be added to the total income of the year for which they are received. Then total income-tax will be calculated at the rates that were prevalent for that financial year.
- Income-tax calculated for that financial year without addition of such arrears or advance receipt in the total income, shall be deducted from the income-tax calculated in previous point.
- The difference is the income-tax payable.
This way relief is provided to the assessee. Arrears or advance receipts of salaries will be computed for income-tax at the old rate that would have been applicable for that relevant financial year.