Arrears: Meaning, Calculation, Income Tax on Arrear Salary

Arrears refer to payment for compensating the salaries left, which should have been paid earlier. Employees are paid arrears when they get a salary hike in one month but receive the amount in some other month. The due amount in this case which is paid at a later date is termed as arrears. 

Arrears refer to payments that are overdue and are supposed to be made at the end of a given period after missing out on the required payments. Total arrears equals the sum of all the payments that have been accumulated over time since the first payment was due. An account can also be said to be in arrears if the service has already been rendered, and the payment is due to be made at the end of the agreed period. For example, an employee is paid a salary in arrears because the service must be offered and completed before any payments can be made.

In terms of payroll, paying in arrears usually refers to paying an employee for work completed from a previous pay period instead of the current pay period.

For example, company X has paid their employees on January 20th for the January 1-15 pay period. Since the employees received their paychecks after they completed the work, you paid them in arrears. 

Let’s calculate this with the help of an example:

Suppose Mr. A has a salary of Rs. 10,000 in the month of March, and he gets an increment of Rs. 5,000 in the month of April. Due to some backend salary processing issues, the amount is reflected in the month of June. So in the month of June along with the increased salary of Rs. 15,000, arrears for the month of April and May amounting to Rs. 10,000 will be credited to A’s account. Hence, in the month of June, the total amount received by A would be Rs. 25,000 (Rs. 15,000 + Rs. 5,000 + Rs. 5,000).

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 financial year, you may be worried about paying a higher tax on such arrears. Hence, in order to save you from the burden of tax due to delay in receiving income, the tax law allows a relief under section 89 (1).

In other words, you will not be required to 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. The relief can be worked out and allowed at the time of deduction of the tax at source by his present employer in the year in which arrears are received. The employee will have to provide the necessary particulars of salary arrears to his present employer in Form 10E. 

Let’s understand this with help of an illustration:

Let’s say that employee X received Rs. 3 lakh as arrear pay in the financial year 2018-2019 for the year 2015-2016, 2016-2017, and 2017-2018. 

Let us assume that under ordinary circumstances, he would have paid a tax of Rs. 20,000. But after the inclusion of arrears, his tax liability increases to Rs. 40,000. 

Further, let’s assume that employee X has paid a tax of Rs. 21,000, Rs. 22,000 and Rs. 23,000 for the financial years 2015-2016, 2016-2017, and 2017-2018 respectively. Had he received the income in the year they were due, the tax liability would have been Rs. 26,000, Rs. 28,000 and Rs. 30,000 respectively. Using this data, the tax deduction available to the employee is calculated.

It is to be noted that if the tax payable in the year of receipt works out to be lower than that payable in the past, the provisions of Section 89(1) do not apply. In other words, if there is no excess tax that the taxpayer is being subjected to on account of receipt of arrears, no relief is admissible.

When a payment arrear is received, it changes your income tax situation. While you are actually in the X income bracket by virtue of your total taxable income, it might push you up in the income tax slab structure. The tax slab might be higher because the government tends to change it every year. 

However, it is mandatory to fill Form 10E to avail the relief. While it is like any other income tax form such as 16A, 16B, 16C it’s always good to know the specifics of a particular form. So, let’s take a look at a step-by-step process of how to fill 10E.

How to fill 10E?

Step 1- Visit www.incometaxindiaefiling.gov.in to file 10E.

Step 2- Login with your PAN card details and password.

Step 3- Click on the ‘e-File’ option on the status bar on top after you have successfully logged in.

Step 4- Now select the option of Income Tax Forms from the drop-down menu.

Step 5- Select Form 10E- Form for Relief u/s 89 from the drop-down box of Form Name.

Step 6- Now, choose the relevant Assessment Year and Submission Mode to continue further.

Step 7- A new page will appear — the first tab on this page will have important instructions and tips on how to fill 10E such as saving as you go, adding rows to enter more values, etc.

Step 8- In the second tab, you will find basic details like name, address, PAN number, etc already filled. Choose the residential status from the drop-down menu

Step 9- Now, you need to fill in the relevant annexure. There will be four — one for salary arrear or premature withdrawal of provident fund, and one each for commutation of pension, compensation received on termination of employment, relief in gratuity payment for 5-15 years of service, and relief for gratuity for service rendered in excess of 15 years.

Step 10- Verify the form and then select preview & submit.

Step11- You can also correct errors in the form if you spot any before submitting by clicking on ‘Edit’.

Step 12- Download a PDF copy for future reference.

What is Form 10E?

Starting the financial year 2014-15 (the assessment year 2015-16), the income tax department has made it mandatory to file Form 10E if you want to claim relief under section 89(1).

Do I need to submit Form 10E to my employer?

Your employer may ask for confirmation of submission of Form 10E before adjusting your taxes and allowing tax relief. It is not mandatory to submit this form to the employer.

Why would a paycheck be paid in arrears?

Paying in arrears makes it easier to calculate and run payroll—especially if a company has commissioned or tipped employees. That’s why most small business owners pay their team in arrears.

What does paying in arrears mean when it comes to accounting?

Paying in arrears doesn’t just apply to payroll—it also means paying for goods or services after you receive them.  If you work with a vendor who gives you a payment term of net 60, you’ll be billed in arrears, since you have 60 days to pay for the items you received. This means that you pay the vendor after you receive the goods or services, so you’re paying in arrears. Another example is paying a contractor’s invoice for services already rendered.

How can I calculate salary arrears?

You can get the amount of additional salary (Arrears) from the arrear document given by your employer. You have to subtract the arrear from the total salary received (including the arrears), which can be taken from your Form 16.

What is an arrear deduction in salary?

If the salary is revised from a previous month then arrears are paid to the employee. Arrears is calculated separately for each component under earnings and the date from which the salary is increased is called the Effective Date

Is Salary Paid in Advance or Arrears? 

Salary is rarely paid in advance. It’s common practice to pay workers after they’ve completed their work, not upfront.

What does paid a week in arrears mean?

A week in arrears just means that you get paid a week later than the week during which the hours were worked. So, for example (assuming a Monday to Friday working week): If your first week of work commenced on Monday 2nd June, you would receive your first pay packet on Friday 13th June.