Relief when salary, etc., is paid in arrears or in advance.

157(1)

Where the total income of an assessee is assessed at a rate higher than the rate at which it would otherwise have been assessed, due to the following receipts,—

• (a) a sum in the nature of arrear or advance salary; or
• (b) salary for more than twelve months in any one tax year; or
• (c) a payment in the nature of “profits in lieu of salary” under section 18(1); or
• (d) arrears of “family pension” as defined in section 93(1)(d), the Assessing Officer shall on an application made to him by the assessee in this behalf, grant such relief, as prescribed.

157(2)

No relief shall be granted on any income on which deduction has been claimed by the assessee in section 19(1)(Table: Sl. No. 12) for any amount mentioned therein, for such, or any other, tax year.

Explanation

Section Summary:

Section 157 of the Income Tax Act provides relief to taxpayers when their income is taxed at a higher rate due to receiving certain types of income in arrears or in advance. This typically happens when salary, family pension, or similar payments are received in a lump sum, pushing the taxpayer into a higher tax bracket for that year. The section allows taxpayers to apply for relief to mitigate the higher tax burden caused by such lump-sum payments.

Key Changes:

This section is not a new provision but is part of the existing framework. However, it is important to note that the relief mechanism under this section is specifically designed to address the tax impact of irregular income flows, such as arrears or advances, which can distort the taxpayer's annual income and tax liability.

Practical Implications:

1. For Employees: If an employee receives a large portion of their salary in arrears (e.g., due to delayed payments) or in advance (e.g., a bonus paid early), their total income for the year may increase significantly, leading to a higher tax rate. This section allows them to apply for relief to reduce the tax burden.
2. For Pensioners: Family pension received in arrears can also push pensioners into a higher tax bracket. This section provides a mechanism to claim relief in such cases.
3. For Businesses: Employers or entities making such payments (e.g., bonuses, arrears) should ensure proper documentation and communication with employees to facilitate the relief application process.

Critical Concepts:

• Arrears or Advance Salary: Payments received for work done in previous years (arrears) or for future work (advance).
• Profits in Lieu of Salary: Payments made in connection with the termination of employment or as compensation for any modification in employment terms.
• Family Pension: Regular payments made to the family of a deceased employee or pensioner.
• Relief Mechanism: The Assessing Officer calculates the relief by comparing the tax liability if the income were spread over the years it relates to, rather than being taxed in a single year.

Compliance Steps:

1. Application for Relief: The taxpayer must file an application with the Assessing Officer, providing details of the arrears or advance payments and the tax year(s) to which they relate.
2. Documentation: Submit supporting documents, such as salary slips, employment contracts, or pension statements, to substantiate the claim.
3. Calculation of Relief: The Assessing Officer will compute the relief by recalculating the tax liability as if the income were spread over the relevant years.

Examples:

• Scenario 1: An employee receives ₹5 lakh in arrears for the previous year’s salary in the current tax year. This pushes their total income into a higher tax bracket. Under Section 157, they can apply for relief, and the tax liability will be recalculated as if the ₹5 lakh were received in the previous year.
• Scenario 2: A family pensioner receives ₹3 lakh in arrears for the past two years. This increases their current year’s income, leading to a higher tax rate. They can apply for relief under this section to reduce the tax burden.

This section ensures that taxpayers are not unfairly penalized for receiving irregular income flows, providing a fair mechanism to adjust their tax liability.