Delayed salary arrears — whether from late increments or settlements — often push employees into higher tax brackets when paid in a subsequent financial year. To mitigate this, the Income Tax Act, 2025 introduces Form 39, which from FY27 will replace the current Form 10E.
Salary arrears are taxed in the year of receipt, not when they were earned. This creates what experts call a “bunching of income” effect.
“When salary arrears are received in a later financial year, the entire amount is taxed in the year of receipt, not in the year it was earned, potentially pushing the taxpayer into a higher tax slab,” said Niyati Shah, vertical head, personal tax, at 1 Finance.
Dipesh Jain, partner at Economic Laws Practice, noted that arrears can increase tax liability either because income crosses into a higher slab or due to changes in tax rates between years.
Preeti Sharma, partner, global mobility services, tax & regulatory advisory at BDO India, added that a lump sum receipt can raise the effective tax rate on incremental income, even if the underlying earnings relate to earlier years.
How Form 39 helps reduce the burden
Form 39 provides relief by recalculating tax liability as if the arrears were taxed in the years they actually pertain to.
“Form 39 allows the taxpayer to recompute tax by allocating arrears to relevant past years and neutralising the excess tax arising purely due to timing differences,” Jain said.
In practice, this involves comparing:
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Tax payable in the year of receipt (with arrears) -
Tax payable if arrears were spread across earlier years
“The excess tax arising in the current year due to timing is allowed as relief, ensuring neutrality,” Sharma said.
Chandni Anandan, tax expert at ClearTax, said that this process can also lead to adjustment or refund of excess tax deducted at source (TDS) once the relief is applied.
Common mistakes taxpayers make
Despite the availability of relief, compliance errors remain frequent.
“One of the most common mistakes is not filing the prescribed form before submitting the income tax return, which can lead to denial of relief,” Shah said.
Experts highlighted several recurring issues:
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Incorrect year-wise allocation of arrears -
Using the wrong tax rates for past years -
Filing the form after the due date -
Lack of proper documentation from employers
“Taxpayers often assume that employer-adjusted TDS is sufficient and skip filing the form, which can result in mismatches and scrutiny,” said Sudhir Kaushik, cofounder and chief executive officer at Taxspanner (a Zaggle company).
Jain added that filing Form 39 along with a belated or revised return can make the claim defective and challengeable.
When the benefit may be limited
Form 39 does not guarantee tax savings in all cases.
“If arrears do not push the taxpayer into a higher slab, the relief may be negligible or nil,” Shah said.
The benefit is also restricted to specific types of income. “Relief does not apply to non-salary incomes such as interest or capital gains,” Jain clarified.
Anandan added that even within salary cases, if income levels across years remain similar, the tax impact — and therefore relief — may be minimal.
Filing process and timing
Experts emphasise that timing is critical when claiming relief.
“Form 39 must be filed online before submitting the income tax return. Failure to do so can lead to denial of relief,” Shah said.
The process typically involves:
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Obtaining a year-wise breakup of arrears from the employer -
Re-computing tax for relevant years -
Filing the form on the income tax portal
Claiming relief in the ITR
From a cash-flow perspective, early submission can help reduce excess tax deduction. “If details are provided to the employer in time, they may factor in relief while deducting TDS,” Sharma said. Otherwise, taxpayers may need to claim a refund later.
Overall, experts say the mechanism is designed to ensure fairness. “It prevents taxpayers from being penalised for delayed payments by aligning tax liability with the period in which income was actually earned,” Shah said.