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What are arrears?

Arrears are paid to compensate the salaries left, which should have been given earlier. Arrears come in to picture, when the employees gets salary hike in one month but receives the amount in some other month. In such case, the company is due to its employees and the due amount which is paid in later date is called as arrears.

Though the management decides to give a rise in salary, it may take some time to process that and in that case, the amount due will be paid as arrears on a later date. The arrears feature will be enabled in the Salary transactions menu, when Arrears option is checked in options settings screen.

How it is used in practical scenarios?

Arrears can be given for various reasons; say for example:

• There may be delay in taking decision from the management on increment issue, which will result in compensation at a later date.
• For example: – Salary increment is declared in June month but it’s applicable from Apr month or from any previous month Date (Like: – 20th May).
• Company had 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 public sector and government organization to revise the salary from an earlier date.
• When Salary deposit date in account is last date of the every month, then salary processing person will start process suppose on 25th assuming 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 do the absent or present then those days salary will paid with later month salary, some it may call as Salary adjustment or Arrears.

Statutory affect on Arrears (PF, PF-Voluntary, ESI, PT and TDS)

All statutory deductions like PF, PF Vol., ESI, PT and TDS are applicable on salary. These deductions will be filed at a later date to the department using Supplementary Challan [Except TDS].

Relief u/s 89 (1):

If the arrears are paid in a year, it could substantially raise the tax liability for the employee in that year. It happens so due to the receipt of arrears which consequently raises the taxable income. Had the employee received the amount in the year(s) when he/she was supposed to receive it, the additional tax would have been reduced instead of becoming a lump-sum amount of tax.

Hence, the law allows a deduction as Relief u/s 89 (1), where the tax amount is calculated as though the taxpayer is required to pay any additional amount of tax (in the year of receipt) than what he/she would have paid otherwise, had he received the money in the year(s) that he was supposed to receive it. Such additional tax need not be paid i.e., it can be reduced from the tax payable.

For e.g., An employee X works as a supervisor in a private limited company was supposed to receive Rs. 1 lakh in the year 2011 got received that amount in the current year. Now if we consider that, with regard to the salary level, Mr. X would have paid a tax of Rs. 1,50,000 but on receipt of the arrears the tax has been raised to Rs. 2,00,000/-.

When we consider the amount of actual year’s (2011) tax where Mr. X was supposed to receive the amount, the tax payable would be Rs.1,40,000/-. Since, Mr. X did not get the amount in that year, the amount paid as tax was only Rs.1,20,000/-.

Now if we compare the taxes payable in two years, only the difference amount has to be paid on account of arrears – Relief u/s 89 (1).

In the above example, the arrears pertaining to only one year are paid but in general practice, the arrears amount is spread over multiple years, in which case, the computation of arrears for each and every individual year has to be calculated to get the exact amount of additional tax payable.