When salary or other income arrears are received in any particular year, one’s tax liability for that year increases. Simply because one’s total income for that year has increased. Most salaried individuals will be able to identify with such situations. But having to pay a higher tax on account of arrears is unfair to the taxpayer. Had he originally received the money in the year(s) that he was supposed to receive it, the additional tax would have been staggered over this time, instead of converging in one year as a lump sum payment.

Our Income tax law has taken the same into consideration and allows a tax deduction under Section 89(1) for this additional tax burden on the tax payer. At times, the employee appraisal process (where the employee can expect a revised salary), takes longer than expected, and the actual payments are postponed. Also, commissions and other cash incentives for sales and marketing personnel, could be reconciled at a later date.
SECTION 89(1)
Basically, the relief under Section 89(1) is arithmetical. It involves ascertaining the two amounts of tax, the first is the amount of tax applicable to the total income, including the extra amount in the year of receipt. The second is calculating the amount of tax by adding the arrears to the total income of the years to which they relate. The difference between the two amounts is the deduction allowed.

In other words, if the taxpayer is required to pay any additional amount of tax (in the year of receipt) than what he would have otherwise paid, had he received the money in the year(s) he was supposed to receive it, such additional tax can be reduced from the tax payable. 

Download Automated Arrears Relief Calculator with Form 10E From the Financial Year 2001-02 to Financial Year 2016-17 (Up to date Version) as per Finance Budget 2016.