Salary Arrears in India
Understanding Salary Arrears in India: Meaning, Reasons & Tax Relief
Salary revisions, delayed increments, payroll corrections, and bonus payouts are common in many organisations. When these changes are applied for previous months, employees may receive an extra amount along with their salary. This additional payment is known as salary arrears.
Salary arrears are taxable in the financial year in which they are received. In some cases, receiving arrears can increase an employee’s tax liability. To help reduce this extra tax burden, eligible taxpayers can claim relief under Section 89(1) of the Income Tax Act by submitting Form 10E.
Salary Arrears at a Glance:
| Particulars | Details |
| Meaning | Salary due for a previous period but paid later |
| Common Reasons | Salary revision, payroll errors, bonus corrections, attendance adjustments |
| Taxable | Yes |
| Tax Relief Available | Yes, under Section 89(1) |
| Form Required | Form 10E |
| Reported in Form 16 | Yes |
In this post, we will explain what salary arrears are, why employers pay arrears, how they are calculated, the tax rules that apply to them, and how employees can claim tax relief under Section 89(1).
Let’s check out these sections:
- What are the arrears?
- What are Salary Arrears?
- Scenarios for Salary Arrears
- Calculation of arrears with example
- Payment in Arrears vs. Payment in Advance
- Are Salary Arrears Taxable in India?
- How to File Form 10E Online
- Income Tax on Arrear Payments – Section 89 (1) Relief
- Tax Savings on Arrears in Salary
- Key Points:
- FAQs
What are the arrears?
Salary arrears in income tax means the pending salary amount that was not paid earlier and is given later. This usually happens when a salary hike is given, but the revised amount is not paid on time. The extra amount that gets paid later is called arrears, and it can increase the income tax a person has to pay.
Let’s understand arrears in a simple way. Arrears are payments that are due from an earlier period. In the case of salary, it means the employee gets the payment now for a month that has already passed.
For example, suppose an employee gets a salary hike in May, which is applicable from March. In this case, the extra salary for March and April will be paid along with the May salary. This extra payment for March and April is called salary arrears.
What are Salary Arrears?
Salary arrears are amounts that an employee was supposed to receive in an earlier month but were paid later. This usually happens when a salary increment, revision, bonus, or payroll correction is applied from a past date.
Simply put, if an employee should have been paid a higher salary earlier but receives the difference at a later date, that extra amount is called salary arrears.
Example:
Suppose an employee gets a salary increment of ₹5,000 per month effective from January, but the revised salary is implemented only in March.
In this case:
- Arrears for January = ₹5,000
- Arrears for February = ₹5,000
Total salary arrears payable = ₹10,000
The employee will receive this additional ₹10,000 along with a future salary payment.
Scenarios for Salary Arrears
There are many times when a company has to pay arrears to an employee. In India, this can happen due to different reasons.
Sometimes, it’s just a small human error while preparing a salary. Other times, it could be because of delays from the admin side or missing paperwork.
If there is any confusion or mistake in the documents, the company may hold back some amount. Once everything is sorted out, that money is paid as arrears. This helps prevent misuse and keeps things fair.
Here are some common reasons why arrears are given:
1. Missed Salary Components
Sometimes, the company forgets to add some part of the salary, like bonuses or incentives. These are usually paid in the next month as arrears.
2. Reimbursements
If the employee has spent money on behalf of the company, and the bill or proof is not clear or delayed, the payment may be held. Once verified, the reimbursement is added later as arrears.
3. Attendance Issues
If there was a mistake in marking the employee’s presence or number of days worked, the salary might be less. After correction, the remaining salary is given next month in arrears.
4. Bonus or Incentive Delay
Sometimes bonuses or performance-based pay are calculated wrongly or missed out. This can affect the employee’s trust in the company. So, it’s important to correct it soon and pay the amount in arrears.
5. Overtime Payment
When an employee works extra hours and the overtime pay is not added, it can feel disappointing. Paying overtime later as arrears shows that the company recognises the effort and values the employee.
Calculation of arrears with example
The calculation of salary arrears is simple and straight.
Formula:
Salary Arrears = Revised Salary – Previous Salary × Number of Months Applicable
Example:
| Particulars | Amount |
| Previous Monthly Salary | ₹40,000 |
| Revised Monthly Salary | ₹45,000 |
| Difference | ₹5,000 |
| Months Applicable | 4 |
| Total Arrears | ₹20,000 |
The employee will receive ₹20,000 as arrears.
Payment in Arrears vs. Payment in Advance
|
Payment in Arrears |
Payment in Advance |
|
Payment is done after the service is taken. |
Payment is done before the service starts. |
|
Example: Salary is paid at the end of the month after the employee has worked. |
Example: Rent is usually paid at the start of the month, before staying. |
|
Other examples: Postpaid mobile bills, electricity bills, property tax, etc. |
Other examples: Insurance premium, prepaid mobile recharge, lease amount, etc. |
Are Salary Arrears Taxable in India?
Yes, salary arrears are taxable under the Income Tax Act. Any arrears received are taxed in the financial year in which you actually receive them, even if they relate to an earlier period.
Since arrears can increase your total income for that year, they may also move you into a higher tax slab and result in a higher tax liability. To reduce this additional tax burden, you can claim relief under Section 89(1) of the Income Tax Act.
How to File Form 10E Online
Employees claiming Section 89 relief must submit Form 10E through the Income Tax portal.
Steps to File Form 10E:
- Log in to the Income Tax e-Filing portal.
- Go to e-File.
- Select Income Tax Forms.
- Search for Form 10E.
- Choose the relevant assessment year.
- Enter arrear details.
- Complete the required schedules.
- Submit the form electronically.
- File your Income Tax Return after submitting Form 10E.
Failure to file Form 10E may result in rejection of Section 89 relief.
For a detailed step by step guide on filing Form 10E, refer to our blog on the Form 10E online filing process: https://saral.pro/blogs/form-10e-online-filing-process/
Income Tax on Arrear Payments – Section 89 (1) Relief
If you get any part of your salary as arrears or advance, or receive family pension arrears, you may end up paying more tax in that year. This happens because your income for the year goes up, and so does the tax slab.
To avoid this extra burden, the Income Tax Act gives you relief under Section 89(1). It helps reduce your tax when you receive past dues in the current year.
Here’s how you can check how much tax relief you can get under Section 89(1):
- First, calculate the total tax on your full income for the year including arrears, bonus or advance salary.
- Then, calculate the tax on the same year’s income without adding the arrears or extra salary.
- Subtract the second amount from the first one. This is the extra tax you paid because of the arrears.
- Now go back to the year for which the arrears belong.
- Calculate the tax for that old year including the arrears.
- Then, calculate the tax for that yearwithout arrears.
- Find the difference between the two amounts from Step 5 and Step 6.
Finally, subtract the amount in Step 7 from the amount in Step 3.
The final amount is the tax relief you can claim.
But if Step 7 is more than Step 3, then you won’t get any relief.
Tax Savings on Arrear in Salary
If you get arrear payments, it can affect your income tax. Even if you fall under a certain tax slab, the arrears might increase your total income and push you into a higher slab. This is more likely since the tax slabs keep changing every year. To get some relief from the extra tax, you need to file Form 10E under Section 89(1) of the Income Tax Act.
Arrear payments are nothing unusual. It simply means payment is made after the work is completed. So instead of being paid for what is expected from you, you are paid for what you have actually done. This makes more sense in many cases.
Many companies follow the system of paying salaries in arrears. So if your salary comes a couple of weeks late, it is quite normal. The main thing is that your salary is correct, no matter when it is paid.
This note was just to explain arrear payments in a simple way. Hopefully, it clears any confusion and helps you understand the concept better.
Key Points Employees Should Remember:
- Salary arrears are delayed payments relating to previous periods.
- Arrears are fully taxable in the year of receipt.
- Receiving arrears may increase your tax liability.
- Relief under Section 89(1) can reduce additional tax.
- Filing Form 10E is mandatory before claiming relief.
Salary arrears are generally reflected in Form 16.
We’ve reached the end! If you have any questions or concerns regarding salary arrears in India, please feel free to leave them in the comments section. We’re here to assist you.
FAQs
Q. What are salary arrears?
Salary arrears are payments made later for salary that should have been paid earlier. This usually happens due to salary hikes, payroll mistakes, or delays in processing.
Q. Are salary arrears taxable?
Yes. Salary arrears are taxed in the financial year in which you actually receive the payment.
Q. How are salary arrears calculated?
Arrears are calculated by finding the difference between the old salary and the revised salary and multiplying it by the number of months for which the revision applies.
Q. Can salary arrears affect my tax slab?
Yes. Since arrears are added to your income for the year, they may increase your taxable income and push you into a higher tax slab.
Q. What is Section 89(1) relief?
Section 89(1) allows employees to claim tax relief if receiving salary arrears results in a higher tax liability.
Q. Is filing Form 10E compulsory?
Yes. You must submit Form 10E before claiming tax relief under Section 89(1).
Q. How are salary arrears shown in Form 16?
Employers generally include salary arrears in the salary details reported in Form 16.
Q. Which assessment year should be selected in Form 10E?
You should choose the assessment year that relates to the financial year in which the arrears were received.
Q. 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, and a calculation of relief under section 89(1).
Q. When should I file the Form 10E?
Before filing the Income tax return, you can file Form 10E.
Q. Is it beneficial for the company to pay arrears
Yes, paying in arrears to employees is beneficial for the company in terms of continuous cash flow, while providing them more time to finalise employee invoices with incentives and bonuses.
Q. Which assessment year do I need to select for Form 10E?
You need to select the year in which you received your arrears.
For example, if you received your arrears in 2025-26, then you need to select your assessment year 2026-27.
