Is salary arear can be taxed?

Salary due in earlier years from an employer or a former employer, which has not been paid or charged to tax in those years, constitutes 'arrears' of salary. As per the provisions of the Income tax Act, 1961 ('Act'), any arrears of the salary paid or allowed to an employee in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any previous year, are chargeable to income tax during the given year under the head 'Salaries'.

 

In other words the same is taxable in the year of payment of the arrears.

The arrears of salary relating to past services could lead to a higher tax incidence for the employees as a result of being taxed in the year of receipt. This is primarily due to progressively increasing slab rates of tax. A change in the income tax slab results in a corresponding change in the rate and quantum of income-tax and surcharge. This could result in a higher tax incidence, which would be unfair to the employees, since, had they originally received the money in the year(s) that it pertains to, the additional tax would have been staggered over the years, instead, of accumulating in a single year as a lump sum payment.

 

The provisions of Section 89 of the Act come as a relief in this context, as they allow a tax deduction for this additional tax burden on employees receiving salary arrears.

 

Section 89 is a beneficial provision under Chapter VIII of the Income-tax Act (the Act), which relates to "Rebates and Relief". The objective of this section is to mitigate hardship caused because of high incidence of tax due to progressively increasing slab rates. The benefit under this is available to every taxpayer who gets salary in advance or in arrears irrespective of being a government employee or private sector employee.

 

Basically, the relief under Section 89(1) is arithmetical and involves ascertaining two amounts of tax. The first is the amount of tax applicable to the total income, including, the arrears in the year of receipt. The second is the amount of tax by adding arrears to the total income of the years to which they relate. The difference between the two amounts of tax is the amount of deduction allowed. In other words, if the taxpayer is required to pay any additional amount of tax (in the year of receipt) than what he would have originally paid had he received the money in the year(s) that he was supposed to receive it, such additional tax can be reduced from the tax payable.

 

Accordingly, the tax payer can claim relief in the return of income for the financial year in which the arrears are received.

sir , please elaborate it more simple terms,

regrards

In simple words the arrears received by you is taxable as per the method provided in s.89 of the Income Tax Act

The employer will deduct tax on the total including the arrears as though the whole was the income of the employee in the current year. But the assessee can do self-assessment as provided under Section 89, submit returns and claim refund. The assessee will be eligible only if he had paid taxes and submitted returns for the year for which the arrears relate.

Mostly for Government employees the Pay Commission recommendations are implemented retrospectively sometimes even from 2 or 3 years back. In such an event the employee will receive huge arrears of past years. The employee has the option to compute tax on the basis that the arrears of income were the income of receipt or as under Section 89.

How to compute under Section 89

Suppose your income for the year 1 was A and the tax due and paid was 'a'. Your income for  year- 2 excluding arrears pertaining to year 1 was B  and the tax due on it  'b'. Let us say the arrears received was C. Now re-compute tax for Year-1 taking your income for that year as A + C. Thus let us say the tax works out to 'c'.. Now the tax payable now will be b + c - a.

Deduction is just as per income tax law

I joined as a employee in february 2013, i received my salary as arrear including february , march and april. Kindly answer me whether i have to pay tax including february or excluding. previously i was not an employee and i not earn morthan 2 laks. answer me please

You have to account for income-tax the arrears of previous years also. But you can treat any salary income pertaining to a previous year as income of that year and compute your tax payable accordingly.

This is  Legal that Employer Deducting Tax On arrears is 100% Legal.

For this You Can Claim Relief under section 89 of income Tax Act, using the Form 10E.

Download the Form 10E on this Link:https://www.exploreincometax.com/Forms-related-to-Indian-Income-tax/Form-10E

If you Submit Details in Form 10E, Employer is Bound to Give Relief Under Section 89, Read with Rule 21AA.

For Reference Just Giving above discussed sections Section 89: https://www.exploreincometax.com/Indian-Income-tax-Act-1961/Section-89

Above Rule 21AA can be Refferred on Link:https://www.exploreincometax.com/Rules-under-Indian-Income-tax-Act-1961/Rule-21AA