It is bonanza year for government employees. Around 16 lakh ex-servicemen have received the first installment of the one-rank-one-pension payouts along with another fifty-two lakh retired pensioners from central government service who would benefit from the 7th Pay Commission recommendations. Although, technically, they have earned the money years back, the pension and pay hikes will be credited as lump sum to their bank accounts only now. This could mean a huge tax bill. There is, however, an escape route which most are not aware of. As per tax rules, if you have received any portion of your salary or pension in arrears or in advance, you are allowed tax relief under section 89(1) .

The intention of the relief is to save you from any additional tax burden due to delay in receiving your earnings . "The relief protects the taxpayer from paying a higher tax. In many cases, the individual might have moved up in the tax slab and should definitely not be penalised with higher taxes because he received his income late," says Archit Gupta, founder and CEO, ClearTax.in. Not many people understand how arrears should be taxed as the calculations are a bit complicated (see box).

While you are claiming relief under Section 89(1) do not forget to fill Form 10E. It is is mandatory to file to be eligible to make the claim. "Taxpayers who have claimed relief under section 89(1) in the previous years but had not filed Form 10E have received letters from the department stating the relief was not allowed as Form 10E was not furnished," says Gupta. Good thing is that Form 10E can be easily filed and submitted online under e-file, other than ITR section.

ELEMENT: Calculating tax relief on arrears correctly.

Step 1: Calculate tax payable on the total income, including arrears for the year in which it is received

Step 2: Calculate tax payable on the total income, excluding arrears for the year in which it is received

Step 3: Calculate difference between tax liability in Step 1 and Step 2

Step 4: Calculate tax payable on the total income, including arrears for the year o which the arrears relate

Step 5: Calculate tax payable on the total income, excluding arrears for the year o which the arrears relate

Step 6: Calculate difference between tax liability in Step 4 and Step 5

Step 7: Subtract the tax difference you arrived at at Step 6 from Step 3. The excess amount is the tax relief you can claim.