According to spirituality, time is an illusion. Does this mean time does not exist or does it mean time exists only as a psychological perception?
Actually Eckhart Tolle does refer to time as psychological time and he even says it is a compulsion and unless we come out of the compulsion of time, we can not be happy.
There are two aspects to this observation. Taking an example, let us say, you are absorbed in a movie or in a conversation with a person you like, you know that hours pass by in minutes. On the other hand, when a task is boring, it seems endless. At the level of mind, this refers to psychological time. Time can be stretched or compressed based on our own mental perception. This observation can in fact be used to positively help you in your day to day activities (for example to get rid of exam fear or to complete tasks faster).
The second aspect is spiritual. If you can stay in the present without any referring thoughts to past or future, the time comes to a halt. This is not a psychological feeling but a different level of consciousness. If you are able to stay fully in the present, there are no anxieties due to future and there are no worries due to past and you have a good chance of achieving the inner happiness. In fact, ability to stay in the present is a requirement for raising consciousness and achieve inner happiness. This is what meditation attempts to do.
Eckhart Tolle refers to the practice of staying in the present as practicing the presence. Focus completely on the task at hand at any time - such as eating food, walking, wearing the shoes etc and gradually the mental chatter will come down and you will stay more in the present. Due to this, you will also experience a shift in consciousness. This practice is similar to mindfulness. A deliberate meditation practice also achieves the same (and more) results but practicing the presence provides the ability to practice anywhere, anytime.
So coming back to time, as long as we are in a certain level of consciousness, we can not rule out time. Sri Yukteswar, while discussing about Yuga theory, says 'there are indeed exceptional personages now living who, having overcome the influence of time, can grasp today what ordinary people can not grasp, but this book is not for those exalted ones, who require nothing of it.".
Until such time, time is not an illusion but an essential necessity in life.