Arrears in salary refer to the amount of money that is due to an employee for work they have already completed but has not been paid to them on the regular payday. Essentially, it is a delayed payment of a part of your salary for a past period. This is different from an advance salary, which is a payment for future work.
Common Reasons for Salary Arrears
Arrears can arise for several reasons, and they are quite common in both government and private sector jobs in India.
- Delayed Salary Revision or Pay Commission Implementation: This is the most common reason, especially in government jobs. When a new pay commission (like the 7th Pay Commission) recommends a salary hike, the hike is often effective from a past date (e.g., hike announced in July, but effective from January). The company then has to pay the difference in salary for the past months. This lump sum payment is the arrears.
- Delayed Promotion: If an employee’s promotion is approved with retrospective effect (from a back date), the difference in salary between the old and new designation for the past period is paid as arrears.
- Payroll Errors: Sometimes, a mistake in payroll processing can lead to an employee being underpaid. The amount that was short-paid is then paid as arrears in a subsequent month.
- Disputes and Settlements: In case of a dispute over wages or a legal settlement, a company might be ordered to pay pending dues to an employee, which would be paid as arrears.
How are Salary Arrears Calculated?
The calculation of arrears is straightforward. It is the difference between what an employee *should have been paid* and what they *were actually paid* for a specific period.
Formula: Arrears = (Revised Salary for the Period) – (Actual Salary Paid for the Period)
Example:
- An employee’s monthly salary is ₹50,000 in January.
- In April, the company announces a salary hike of ₹5,000 per month, effective from January 1st.
- The employee received ₹50,000 for January, February, and March.
- The employee *should have received* ₹55,000 for each of those months.
- Arrears Calculation:
- Difference per month = ₹55,000 – ₹50,000 = ₹5,000
- Total arrears for 3 months (Jan, Feb, Mar) = ₹5,000 x 3 = ₹15,000
The company will pay this ₹15,000 as a lump sum, usually with the April salary.
| Month | Salary That Should Have Been Paid | Salary Actually Paid | Monthly Arrear |
|---|---|---|---|
| January | ₹55,000 | ₹50,000 | ₹5,000 |
| February | ₹55,000 | ₹50,000 | ₹5,000 |
| March | ₹55,000 | ₹50,000 | ₹5,000 |
| Total | ₹1,65,000 | ₹1,50,000 | ₹15,000 |
Taxation of Salary Arrears in India
Salary arrears are fully taxable in the year they are received. However, receiving a large lump sum amount can push an individual into a higher tax slab for that year, leading to a higher tax liability. To prevent this unfair burden, the Income Tax Act provides a tax relief under Section 89(1).
An employee can claim relief under Section 89(1) by recalculating the tax for the years to which the arrears pertain. This ensures that they pay the same amount of tax as they would have paid if the arrears had been received in the respective years. To claim this relief, the employee must file Form 10E online on the income tax portal. For official details, refer to the Income Tax Department website. This is different from casual income, which is taxed differently.
Frequently Asked Questions (FAQs)
What is meant by arrears in salary?
Salary arrears are the pending dues that an employer owes to an employee for work performed in a past period. It is the difference between the salary an employee was supposed to receive and the salary they actually received, which is paid later as a lump sum.
Why are arrears paid?
Arrears are typically paid due to a retrospective salary hike, a delayed promotion, or the implementation of a new pay commission from a back date. They can also arise from corrections of payroll errors where an employee was previously underpaid.
Are salary arrears taxable in India?
Yes, salary arrears are fully taxable in the financial year in which they are received. However, you can claim tax relief under Section 89(1) of the Income Tax Act to avoid paying a higher tax due to being pushed into a higher tax bracket.
How do I claim tax relief on arrears?
To claim tax relief under Section 89(1), you must electronically file Form 10E on the official income tax e-filing portal. You must file this form before you file your Income Tax Return (ITR) for that year.
What is the difference between arrears and outstanding salary?
While similar, ‘arrears’ usually refer to payments delayed due to a retrospective revision in salary. ‘Outstanding salary’ or ‘salary payable’ is a broader accounting term that refers to any salary that has been earned by an employee but not yet paid by the company as of a specific date.