Hello, in this post we will go through a quick guide to Salary arrears in India.
We will cover the following:
- What are arrears?
- Difference between payment in arrear and payment in advance
- Practical scenarios for arrears
- Calculation of arrears with example
- Income tax on arrear salary – relief under section 89(1)
What are Salary Arrears in India?
Arrear refers to payment for compensating the salaries left, which should have been given earlier. Employees are paid arrears when they get a salary hike in one month but receive the amount in another month. In this case, the company due to its employees and the due amount which is paid on a later date is termed as arrears.
The arrears feature will be enabled in the Salary transactions menu when the Arrears option is checked in the options settings screen.
Difference between payment in arrear and payment in advance
Payment in arrear –
- It is a payment that is paid late or overdue, after a service has been provided by the employee to the employer.
- Payment in arrears includes property taxes, postpaid phone service and others.
Payment in Advance –
- Payment in advance is paid before the actual service of employment.
- It includes the Insurance premium, lease and others.
How are arrears used in practical scenarios?
Arrears are given for various reasons. Below listed are some of the reasons:
- Delay in taking a decision from the management on the increment issue may result in compensation at a later date.
- For example: If the salary hike is declared in the month of June, but it is applicable from the month of Apr or from any previous month date.
- The company had a financial crunch and decided to revise the salary from an earlier month at a later date.
- Company may announce the incentive in terms of increment from an earlier date.
- Pay Commission may suggest revising the salary in the public sector and Govt organization from an earlier date.
- When the Salary deposit date in the account is the last date of every month, then the salary processing person will start the process suppose on 25th assuming the last 5-6 days all employees will be Present / Absent / Leave as on last attendance and salary will be credited to their account. In this case, if any employee will take leave, or they are absent or present then those days salary will be paid with later month salary, you may call it as Salary adjustment or Arrears.
Calculation of arrears [with example]
Raju has a salary of Rs. 10,000 in the month of March and he gets an increment of Rs. 5000 in the month of April. Due to some backend salary processing issues, the amount is reflected in the month of June. Also, in the month of June arrears for the month of Apr and May will be reflected i.e., Rs. 10,000.
Income tax on arrear salary – relief under section 89(1)
Tax is calculated on the total income earned or received during the year. If your total income includes any past dues paid in the current year, you may be worried about paying a higher tax on such arrears.
In order to save you from any additional burden of tax due to delay in receiving income, the tax laws allow a relief u/s 89(1).
In other words, you need not pay more taxes if there was a delay in payment to you, and you were in a lower tax bracket for the year you received the amount.
You can also see how arrears work in Saral PayPack
How can I save tax on Salary Arrear?
If you received an arrear in salary then you can save your tax on additional income, such as filing the form 10E under section 89(1) to claim relief, a calculation of relief under section 89(1).
When should I file the form 10E?
Before filing the Income tax return, you can file form 10E.
Is this beneficial for company to pay arrears
Yes, paying in arrears to the employees is beneficial for the company in terms of continuous cash flow while providing them more time to finalize employee invoices with incentives and bonuses.
Which assessment year do I need to select for file form 10E?
You need to select the year in which assessment year you received your arrear.
For example – If you received your arrears in 2021-22, then you need to select your assessment year 2022-23.