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TDS

How is the Salary Arrear Taxed?

Salary arrears are paid by employers to their employees. Calculating TDS on Salary arrears is an important process and in this article, we will tell you all about it.

The Income Tax Act of 1961 gives certain rules to calculate the TDS on salary arrears. In this article, we will talk about salary arrear taxation. Read on to know more.

What Is Salary Arrear?

Salary arrear is the salary amount that is due. This amount is not yet paid to the employee. All employers try their best to pay the salary on time. However, due to some reasons such as salary hikes or issues within the organisation, it might be difficult to pay the salary on time sometimes. 

In such a case, this amount remains unpaid and is carried to the next cycle of salary. There are some different rules and regulations regarding taxation on salary areas. Employees are eligible for exemptions on TDS on salary arrear.

Salary Arrear Taxation: TDS

The central government of India imposes a tax on the income generated by an individual through various sources. The tax is termed income tax. There are certain rules and regulations on the basis of which tax is deducted from an individual’s income and salary. Income taxes prove to be a great source of revenue for the government, both state and Central. The tax received by the government is used for public services.

The total earnings of a financial year are taxed by the government according to the rules made. There are some ways through which you can save the tax on your salary or income. The salary arrear you receive might have some tax exemptions. The salary arrear is paid to an employee as a due payment. If you received a salary arrear you must fill the Form 10E and take advantage of the tax relaxation in the year you receive the salary arrear.

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How are Salary Arrears Calculated?

Salary arrears refer to unpaid wages or compensation that an employee is owed for work that has already been completed. This can happen for a variety of reasons, such as an employer not having enough funds to pay employees or a delay in processing payroll. 

They are deferred payments made by the employer to the employee. Arrears of salary are calculated by adding the outstanding amount with late fees or penalties for late payment and then subtracting any partial payment that has already been made. 

Arrears = (Revised Salary – Previous Salary) x Number of Months

Salary arrears are common when employees receive salary hikes in one month, but the hiked amount is credited in the following month.  For example, if an employee gets a salary hike of ₹5,000, effective from April, but due to payroll issues, the increment doesn’t get deposited into their account until August, they will receive a total of ₹45,000 in August, where ₹25,000 is the arrear payments accumulated over the last five months.

Salary arrears are taxable, and tax is calculated on the total income earned or received during the year. However, Section 89(1) provides tax relief from adding back-dated arrears as that can often push the employee into a higher tax slab.

How is Salary Arrear Taxed and What are the Tax Exemptions on it?

The income tax act of 1961 mentions that the tax will be deducted from the total annual amount earned by an individual in that particular year. There are certain exemptions granted based on different situations.

 In case of salary arrears also, income tax relief is provided under Section 89(1). If a person did not receive the complete salary in the previous year and is being paid in the next year they might have to pay more taxes if there were no exemptions provided. TDS on salary arrear get some exemptions provided by the government.

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The government provides Form 10 E, which is compulsory to fill if you want to avail the tax exemption benefits on the salary arrears you receive. Have a look at the steps to fill out form 10 E.

  • Go to the website of income tax India e-filing.
  • Login to the website with the help of your pan card and the password. 
  • Now select the option e-file at the top of the site. 
  • You will see an option for Income Tax forms in the Drop down menu click on that option. 
  • Now select Form 10E and then continue further.
  • When a new page appears you have to fill in the details such as Savings, PAN Card details, name, address, etc. 
  • You also have to choose a residential status.
  •  After filling in all the necessary and required details, verify and preview the form and submit it. 
  • If you have any errors you can correct them by clicking on the ‘edit’ option. An option for downloading a PDF copy of the form is also available.

This form provides you opportunities to avail the tax exemption benefits provided by the central government on the salary areas to receive. It is not mandatory to make the employer aware of this form. However, in some cases, if the employer asks you can provide them with the downloaded PDF.

Section 89 (1) under the Income Tax Act of 1961 gives certain situations where an employee can get exemptions on TDS on salary arrear. Usually, the taxes from the year in which they received the salary arrear is adjusted to the year in which the tax was due.

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Relief Calculation on Tax on Salary Arrears

Calculating TDS on salary arrears is something that you should know about. Not only does it help you in budgeting but also allows you to see if you can get an exemption from any other methods. Here are the steps for calculating tax exemptions on salary arrears.

  • Calculate your yearly income and the tax payable on it.
  • Now add the arrears you received in that year to the total income and calculate the tax payable on it. 
  • Calculate the difference between these two taxes. Let the difference be X.
  • Now calculate the tax on the Annual income of the year to which the arrears were related to.
  • Add the arrears to that year’s income and calculate the taxes payable. 
  • Now find the difference between these two. Let the difference be Y
  • Now subtract X from Y and the difference that you receive is the tax exemption that will be allowed.

If you wish to calculate the exact structure of your salary and the taxes payable on it you can use the calculator provided by Vakilsearch. You will have to enter the basic details of your salary and expenses and you will get information about the TDS on salary arrear and the exemptions you will receive.

FAQs:

1. What section of the Income Tax Act provides relief for arrears?

Section 89(1) of the Income Tax Act 1961 provides relief to taxpayers who receive salary arrears or other income in arrears.

2. How does the taxation of arrears differ from regular salary income?

Your regular salary income is taxed in the year in which you earn it. For example, if you receive your monthly salary in April, it is taxed in the financial year corresponding to that year. In contract, salary arrears are taxed in the year in which you receive them and not in the year in which you earned them. This can lead to a unique tax situation where you are taxed on an income earned in a previous year in the current year. How does salary arrear taxation impact employees in different tax brackets? Salary arrear taxation can impact employees in different tax brackets as it can push them into higher tax brackets, resulting in higher tax liabilities. However, relief under Section 89(1) can help reduce the additional tax burden from arrears

3. Can I get tax refunds on the excess tax paid due to salary arrears?

Yes, taxpayers can claim tax refunds on the excess tax paid due to salary arrears by providing details related to their arrears at the time of filing their tax returns. Remember, to avail refunds Form 10E has to be filed before filing of the Income Tax Return.

4. How does the financial year affect the taxation of arrears?

The financial year affects the taxation of arrears as the tax liabilities for a taxpayer are calculated from the income earned or received during that financial year. When it comes to choosing the assessment year for arrears, taxpayers must choose the assessment year in which the arrears have been received.

5. Are there any penalties if I forget to declare my salary arrears in my tax returns?

Yes, there can be penalties if taxpayers forget to declare their salary arrears in their tax returns. Taxpayers must declare their salary arrears in their tax returns and claim relief under Section 89(1) to avoid any penalties.

6. Are there any specific exemptions or deductions applicable to salary arrears?

There are no specific exemptions or deductions applicable to salary arrears. However, taxpayers can claim relief under Section 89(1) to reduce the additional tax burden from arrears

Conclusion

Salary arrears are usually due payments that are paid by the employer to the employee. The salary payments might be due because of several reasons, the most common reason being the salary hike that was implemented earlier but had not been paid yet.

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