Sleet

Salary Arrears Paid This Year: Section 157 Relief and Form 39 (Earlier Form 10E)

Nihit Dobariya
Payroll
6 min read
Quick answer

Salary arrears are taxed in the year they are paid. Section 157(1) of the Income-tax Act, 2025 (earlier section 89) gives relief for the extra tax caused by bunching, claimed on Form 39 (earlier Form 10E) on the e-filing portal. Employers can give the relief through TDS, but should first see the employee's filed Form 39.

Accountant working through salary figures with a calculator

Wage settlements, delayed increments and pay-commission style revisions often pay months of back pay in one go. The arrears are taxed in the year they are received, so the employee can land in a higher slab for that year. The law gives relief for this. Under the Income-tax Act, 2025 it sits in section 157(1) and is claimed on Form 39, which replaced Form 10E from 1 April 2026. Here is how the relief is worked out, and how payroll should handle it.

Key points covered in this guide: The rule, old and new, How the relief is computed, Who files, and when, The employer's part, and why to collect the form first, A worked example

The rule, old and new

Up to tax year 2025-26From tax year 2026-27
Relief sectionSection 89(1), 1961 ActSection 157(1), 2025 Act
Computation ruleRule 21A, 1962 RulesRule 73, 2026 Rules
FormForm 10EForm 39

The form follows the tax year in which the arrears are received. Arrears paid in October 2026 for 2025-26 are claimed on Form 39, even though they relate to an earlier year under the old Act.

Form 39 also covers advance salary, family pension arrears, gratuity, retrenchment compensation and commuted pension. This post deals with salary arrears.

How the relief is computed

  1. Tax this year with the arrears. Work out tax on the year's total income, including the arrears.
  2. Tax this year without the arrears. Work out tax on the same income, leaving the arrears out.
  3. Extra tax this year = step 1 − step 2.
  4. Extra tax in the earlier years. For each year the arrears relate to, work out tax on that year's income with its share of the arrears added, less tax on that year's income as it was. Use the rates of that year and the regime the employee was in that year.
  5. Relief = step 3 − the total of step 4. If the answer is zero or negative, there is no relief.

The relief is real only when the earlier years' marginal rate was lower than this year's. If the employee was in the same slab, it is small or nil.

Cess is included in each tax figure. The earlier years' figures come from the returns already filed, so ask the employee for them.

Who files, and when

  • ✓The employee files Form 39 on the income-tax e-filing portal, verified by digital signature or electronic verification code. It cannot be revised once submitted.
  • ✓Without Form 39, the claim can be rejected when the return is processed, and the employee gets a demand.
  • ✓The deadline: Form 39 must be filed on or before the due date specified in section 263(1)(c) of the Income-tax Act, 2025, and before the return that claims the relief. If the employer is to give relief through TDS, file it before the employer's final TDS run for the year.

The employer's part, and why to collect the form first

Under section 392, an employee of a company, cooperative society, local authority, university or similar body, or a government servant, may give the employer the particulars in Form 39. The employer may then allow the relief while working out TDS.

The safe practice:

  1. Ask for the Form 39 acknowledgement from the portal, not a spreadsheet.
  2. Check the computation: the arrears split by year should match your payroll records, and the earlier years' income should match the Form 130 (earlier Form 16) you issued.
  3. Reduce TDS only by the relief shown.
  4. Show the relief in the employee's Form 130 and in the salary details of Form 138 (earlier Form 24Q).
  5. Keep a copy with the payroll file for the year.

Why insist? If you reduce TDS and the employee never files Form 39, the return claims relief the department does not see. The employee gets a demand, and you have to explain why your TDS was lower than the slab rates required. The filed form is your evidence.

A worked example

A Nashik automotive components maker signed a wage settlement in September 2026, backdated to 1 April 2025. A supervisor receives ₹3,00,000 of arrears in October 2026, all relating to 2025-26. He is in the new regime both years, and the slabs did not change.

  • ✓2026-27 taxable income without arrears: ₹15,00,000 (after the ₹75,000 standard deduction).
  • ✓2025-26 taxable income as filed: ₹14,00,000.

This year (2026-27):

  1. With arrears, ₹18,00,000: ₹20,000 (5% of ₹4 lakh) + ₹40,000 (10% of ₹4 lakh) + ₹60,000 (15% of ₹4 lakh) + ₹40,000 (20% of ₹2 lakh) = ₹1,60,000. With 4% cess: ₹1,66,400.
  2. Without arrears, ₹15,00,000: ₹20,000 + ₹40,000 + ₹45,000 (15% of ₹3 lakh) = ₹1,05,000. With cess: ₹1,09,200.
  3. Extra tax this year: ₹1,66,400 − ₹1,09,200 = ₹57,200.

Earlier year (2025-26):

  1. As filed, ₹14,00,000: ₹20,000 + ₹40,000 + ₹30,000 (15% of ₹2 lakh) = ₹90,000. With cess: ₹93,600.
  2. With arrears, ₹17,00,000: ₹20,000 + ₹40,000 + ₹60,000 + ₹20,000 (20% of ₹1 lakh) = ₹1,40,000. With cess: ₹1,45,600.
  3. Extra tax in 2025-26: ₹1,45,600 − ₹93,600 = ₹52,000.

Relief: ₹57,200 − ₹52,000 = ₹5,200.

The relief is modest because his income was nearly the same in both years. An employee whose earlier-year income was well below the ₹12 lakh rebate level would get much more, since the arrears would have been taxed at a lower rate, or not at all, in that year.

Once he files Form 39 and hands over the acknowledgement, payroll reduces the remaining TDS for the year by ₹5,200.

Frequently asked questions

Can relief be claimed for arrears relating to years before the new regime existed?

Yes. Each earlier year is computed under the rates and regime that applied then.

Does the employer have to give the relief through TDS?

No. The law lets the employer allow it. If you do not, the employee claims it in the return and gets a refund.

What if arrears relate to three different years?

Split them by year and work out step 4 for each year. The relief is step 3 less the total of all earlier years.

Is PF on arrears affected?

No. PF on arrears follows EPF rules and is separate from the income-tax relief.

Sources

This is a summary, not legal advice. Confirm the computation in Rule 73 and the Form 39 instructions on incometax.gov.in or with your chartered accountant.

Nihit Dobariya

Written by

HR Manager, Airwix Technologies (Sleet)

Nihit Dobariya is the HR Manager at Airwix Technologies in Ahmedabad, where he runs HR and payroll for the team behind Sleet. He writes about payroll, PF and ESIC, professional tax, the labour codes and everyday HR practice for Indian employers, and checks each rule against the official notification before it is published.

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