Salary Arrears: All you need to know about salary arrears

It feels great to receive your salary arrears, but do you know it increases your tax liability?

An employer is bounded by regulations when paying salaries to employees. While they do their best to pay salaries regularly, an amount, especially after a hike, may sometimes remain unpaid and carried to the next year or salary cycle. This outstanding amount is called salary arrears.

It is eventually paid by the employer at some stage. However, per the Income Tax Act, 1961, if an employee is granted an arrear of salary and tax is not charged in the previous tax cycle, it will be charged in the current year.

Fortunately, there are a few relaxations on income tax for salary arrears. This article talks about how salary arrears are calculated and various ways to save taxes on salary arrears.

Introduction to salary arrears

Arrears refer to overdue payments meant to be paid at the end of a specific period. All payments due since the first payment comes under the arrears. Employees commonly receive arrears when they get a salary hike but get the updated salary in another month. The due amount is paid later after salary restructuring in the form of salary arrears.

What does arrear mean when it comes to payroll?

When it comes to payrolls, the salary paid to an employee for an earlier month instead of the current month is an arrear. Imagine an employee gets a hike in May, but the hike is effective from March. The employee receives the hiked salary amount from March and April with the May salary. This is called arrears.

Arrear calculations

Let's take another example to calculate the salary arrears. Assume you get a salary hike of ₹10,000 in April, but the increment is reflected in June due to the salary restructuring and backend processing. As a result, you'll receive an arrear amount of ₹20,000 (₹10,000 for April and ₹10,000 for May) with an increased salary in June.

Income tax on salary arrears and relaxation

Income tax is levied on the total earnings in the financial year. If your income includes dues from the past salary, you might be worried about paying extra tax on the total earnings. However, due to the late receipt of income, the Income Tax Department allows relaxation under Section 89(1) to save you from the additional tax burden.

There are several other ways to save on taxes, including tax-saving deposits. IDFC FIRST Bank offers fixed deposit (FD) accounts in which you can invest up to ₹1.5 lakh without paying tax on the returns. The investment is risk-free, and you earn a yearly interest rate of up to 8.00% on your deposits.

Saving taxes on salary arrears

Your income tax situation might change because of an arrear in your salary. You may be pushed into a higher taxable slab due to increased net income in the current year because of an overdue amount in your compensation. However, you can claim tax savings under section 89(1) by filling out Form 10E.

It is compulsory to fill the Form 10E to use the salary arrear relaxation in the current year. Like other income tax forms such as Form 16A, 16B and 16C, you can visit the Income Tax portal and fill out Form 10E online.

Knowing the specifics of your salary and any advance or arrear amount is essential to save on your taxes and plan your finances effectively. Also, remember that employers are bound by law to pay your arrears. 

Discover different types of accounts like savings accounts, salary accounts etc. at IDFC FIRST Bank

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.