Salary Arrears: Meaning, Calculation & Tax Relief with Form 10E Explained

Salary arrears explained in simple terms with examples. Learn how arrears are calculated, taxed under Indian laws, and how to save tax using Section 89(1) relief with Form 10E. Avoid overpaying tax on arrears with practical guidance.

Introduction

When you receive your monthly salary, you expect it to reflect the work you did in that period. But sometimes, your employer may pay you an additional amount later, covering differences from earlier months. This extra payment is known as salary arrears. In simple terms, arrears mean the balance of salary that was due to you for past months but paid at a later date.

Employees commonly get arrears in situations like:

• Increments – when a salary hike is announced but applied with retrospective effect.
• Pay revisions – after company policy changes, government notifications, or wage settlements.
• Dearness Allowance (DA) hikes – especially for government employees, where DA rates are revised and arrears are credited for the previous period.

While receiving arrears feels like a financial bonus, it also brings a layer of complexity. Since arrears add to your income for the year in which they are received, they can increase your taxable income and affect the tax deducted at source (TDS). This often leads to confusion in salary slips, mismatch in income tax returns, or even higher tax outgo if not planned properly.

That’s why understanding arrears meaning in salary, arrear calculation, and arrears taxation is important for every employee. Under the Indian Income Tax laws, specific provisions like Section 89(1) relief with Form 10E help taxpayers avoid paying extra tax due to arrears. Knowing these rules ensures you not only calculate arrears correctly but also save tax legally.

What are Salary Arrears?

Salary arrears simply mean the portion of your salary that was due for a past period but paid later. In other words, it is the money you should have received earlier but was credited to you at a later date because of changes in your pay structure.

Example of Arrear Salary Meaning

Suppose your basic salary was ₹40,000 per month, and you got an increment to ₹45,000 in January. However, the HR team applied the new salary from April onwards. Later, in June, you receive an extra amount covering the difference (₹5,000 × 3 months = ₹15,000). This additional ₹15,000 is your salary arrears.

Common Situations When Arrears Arise

1. Annual Increments (delayed application):
   When your yearly increment is approved but implemented after a few months. The difference between old and new salary for the delayed months is paid as arrears.
   Example: Increment effective from January, but updated in April payroll.
2. Pay Revisions after Wage Settlement:
   Many companies and government bodies revise pay structures after negotiations or policy changes. If the revision is made applicable from an earlier date, the difference for the previous months becomes arrears.
3. Dearness Allowance (DA) Hike with Retrospective Effect:
   For government employees and PSU staff, DA is revised periodically. If the hike is announced later but effective from an earlier month, the extra payment is credited as DA arrears.
4. Promotions / Revised Pay Structure with Backdated Effect:
   When you get promoted or your pay band is upgraded, but the effective date is earlier than the announcement, the salary gap for that backdated period is released as arrears.

Difference Between Arrears and Advance Salary

• Arrears Salary: Money due from past months but paid later. Example: pending increment credited later.
• Advance Salary: Money paid in advance for future months, before it is actually due. Example: company pays you two months’ salary ahead before you go on long leave.

In short, arrears are delayed payments of the past, while advance salary is a pre-payment for the future.

DA Arrears Calculator: Instantly Calculate & Maximize Your Arrears Benefits

How are Salary Arrears Calculated?

Calculating salary arrears is straightforward if you follow a clear sequence. Use the steps below and the examples that follow.

Step-by-step approach (arrear calculation formula)

1. Check the revised salary/pay scale.
   Find the effective date and the revised amounts (increment, DA %, pay band, etc.).
2. Compare the old vs new structure for the affected period.
   Identify each month between the effective date and the date payroll actually changed.
3. Compute the difference month-wise.
   For each affected month: Difference = New monthly pay − Old monthly pay.
4. Add all differences = total arrears.
   Arrears = Σ (New − Old) for all affected months.

Pro tip: If the increment changes Basic, linked components like HRA (as % of Basic) and employer PF may also change. Include those differences in the month-wise calculation.

Practical table (sample calculation)

Scenario: New Basic is ₹45,000, but payroll applied it from April. It should have been effective from January. Old Basic was ₹40,000. Only Basic changed.

This is the simplest arrear salary calculation with example. If HRA were 40% of Basic, you would also compute the HRA difference month-wise and add it to the arrears.

Example 1: Annual increment applied with 3 months’ delay

• Old Basic: ₹40,000
• New Basic: ₹45,000
• Effective date: 1 January
• Payroll applied from: 1 April
• Affected months: Jan, Feb, Mar (3 months)

Per-month difference: ₹45,000 − ₹40,000 = ₹5,000
Total arrears: ₹5,000 × 3 = ₹15,000

If HRA = 40% of Basic, then:

• Old HRA = 40% × 40,000 = ₹16,000
• New HRA = 40% × 45,000 = ₹18,000
• HRA difference per month: ₹2,000
• HRA arrears for 3 months: ₹2,000 × 3 = ₹6,000

Grand arrears (Basic + HRA): ₹15,000 + ₹6,000 = ₹21,000

Example 2: DA revised retrospectively by government (DA arrears)

• Basic Pay: ₹50,000
• Old DA rate: 42%
• New DA rate: 46%
• Effective date: 1 January
• Paid in payroll from: 1 April
• Affected months: Jan, Feb, Mar (3 months)

DA difference per month (arrear calculation formula):

DA Arrears = (New DA% – Old DA%) × Basic Salary

Total DA arrears: ₹2,000 × 3 = ₹6,000

Note: Some departments compute DA on Basic (and certain admissible pay elements). Always apply the correct base and rules used by your employer.

Taxation of Salary Arrears in India

While receiving salary arrears feels like a welcome addition to your income, it also creates a taxation challenge. Since arrears are paid in a lump sum for past months, they are taxable in the year of receipt—not in the year to which they relate. This sudden inclusion often increases your taxable income, pushing you into a higher tax slab for that financial year.

Why Arrears Increase Taxable Income Suddenly

• Salary arrears are added to your current year’s salary income, even if they belong to previous years.
• This increases the gross taxable income in the current year.
• Result: You may face a higher income tax liability because the arrears push your income into a higher tax slab.

Example:
If your annual salary is ₹8,00,000 (20% tax slab), and you receive ₹2,00,000 arrears, your income becomes ₹10,00,000. This pushes a portion of your salary into the 30% slab, increasing your tax burden.

Section 15 of the Income Tax Act: Taxability of Arrears as Salary

Under Section 15 of the Income Tax Act, any salary arrears are taxable as salary income in the year of receipt.

• It doesn’t matter which financial year the arrears actually belong to.
• They will be taxed under the head “Income from Salary” in the year you receive them.

This is why arrears are always reflected in Form 16 for the year in which they are credited to your account.

Tax Deducted at Source (TDS) on Arrears

Employers are required to deduct TDS (Tax Deducted at Source) on arrears just like they do for normal salary.

• Arrears are added to your monthly taxable salary in the month of payment.
• TDS is calculated on the total taxable salary (regular salary + arrears).
• This can result in a higher TDS deduction in the month arrears are paid.

The Problem: Higher Tax Burden Due to Arrears

The main issue with arrears taxation is that your entire arrears amount is taxed in a single year, instead of being spread across the years to which it belongs. This often leads to:

• A jump to a higher income tax slab.
• More TDS deduction by your employer.
• Reduced take-home salary in the arrear month.
• Feeling of being “overtaxed” despite the arrears belonging to earlier years.

This is where Section 89(1) relief with Form 10E comes in, helping taxpayers reduce the extra burden by adjusting arrears taxation across past years.

Relief under Section 89(1) – To Reduce Tax Burden

Getting arrears often creates a higher tax liability because the amount is added to your income in one year, even if it belongs to past years. To solve this, the Income Tax Act, Section 89(1) provides relief so that you don’t pay extra tax just because of arrears.

What is Section 89(1) Relief?

Section 89(1) is a special provision that ensures fair taxation of salary arrears. It allows you to spread the arrears across the financial years to which they belong and calculate tax accordingly.

In simple terms:

• Without relief → Arrears taxed in one year = higher tax.
• With Section 89(1) relief → Tax recalculated as if arrears were received in the correct past years = reduced burden.

Who is Eligible for Section 89(1) Relief?

You can claim Section 89(1) relief if:

• You received arrears of salary, pension, gratuity, or similar payments.
• These arrears caused you to move into a higher tax slab and increased your tax liability.
• You are willing to file Form 10E online before filing your Income Tax Return (ITR).

Requirement: Filing Form 10E Online

• Relief cannot be claimed directly in the ITR.
• You must file Form 10E on the Income Tax e-filing portal before submitting your return.
• Without Form 10E, the Income Tax Department may deny your relief claim and send a notice.

Step-by-Step Process of Claiming Relief under Section 89(1)

1. Calculate tax payable on total income including arrears (for the current year).
2. Calculate tax payable on total income without arrears (for the current year).
   • Difference = Extra tax paid due to arrears in current year.
3. Compute tax for past years (when arrears actually belonged):
   • Recalculate tax liability by adding arrears to those years.
   • Find the difference in each year.
4. Relief = Excess tax paid due to arrears in current year − Extra tax that would have been payable in past years.

Detailed Numerical Example of Section 89(1) Relief

Scenario:

• Employee receives ₹1,20,000 arrears in FY 2024-25 (belonging equally to FY 2022-23 and FY 2023-24).
• Regular income (without arrears) is ₹7,00,000 each year.

Step 1: Tax liability in year of receipt (FY 2024-25)

• Income including arrears = 7,00,000 + 1,20,000 = ₹8,20,000
• Tax (old regime assumed):
  • Upto ₹2.5 lakh → Nil
  • Next ₹2.5–5 lakh (₹2.5 lakh) @5% = ₹12,500
  • Next ₹5–10 lakh (₹3.2 lakh) @20% = ₹64,000
  • Total tax = ₹76,500

If arrears not added (just 7,00,000 income):

• Tax = ₹52,500

Extra tax due to arrears in current year = ₹76,500 − ₹52,500 = ₹24,000

Step 2: Tax liability in past years with arrears

(a) FY 2022-23 with arrears of ₹60,000)

• Normal income = ₹7,00,000
• With arrears = 7,60,000
• Tax (old regime):
  • Upto ₹2.5 lakh → Nil
  • Next ₹2.5–5 lakh = ₹12,500
  • Next ₹2 lakh (5–7 lakh) @20% = ₹40,000
  • Next ₹60,000 (7–7.6 lakh) @20% = ₹12,000
  • Total = ₹64,500

Tax without arrears = ₹52,500
Extra tax due to arrears (2022-23) = ₹12,000

(b) FY 2023-24 with arrears of ₹60,000)

• Same calculation as above → Extra tax = ₹12,000

Total extra tax if arrears were spread across years = ₹12,000 + ₹12,000 = ₹24,000

Step 3: Relief under Section 89(1)

• Extra tax paid in year of receipt (2024-25) = ₹24,000
• Extra tax if arrears taxed in past years = ₹24,000

Relief = ₹24,000 − ₹24,000 = Nil (No benefit in this case)

👉 In many cases, though, arrears push a bigger portion into a higher slab, so relief gives significant savings.

Common Mistakes While Filing Form 10E

• Not filing Form 10E but still claiming relief in ITR → leads to notice.
• Entering wrong breakup of arrears across years.
• Miscalculating arrears without considering HRA, DA, PF impact.
• Filing Form 10E after ITR submission → relief gets rejected.

Practical Examples of Salary Arrears with Tax Relief

To clearly understand how salary arrears and Section 89(1) relief work in real life, let’s go through some practical arrear examples. These will show how your tax burden changes with and without relief.

Example 1: Employee Receiving Arrears Due to Increment

Scenario:

• Mr. A earns ₹6,00,000 annually.
• He was eligible for an increment of ₹50,000 from January, but payroll updated it only from April.
• Arrears for 3 months = ₹12,500.

Tax Impact Without Relief:

• Current year income = ₹6,00,000 + ₹12,500 = ₹6,12,500.
• Tax is calculated on higher income in one year → may increase slab liability.

Tax Impact With Section 89(1) Relief:

• That ₹12,500 is spread back into FY of increment (3 months).
• Recalculation may show no extra slab jump, so tax payable is reduced.
• Filing Form 10E ensures correct adjustment.

Outcome: With relief, Mr. A avoids paying higher tax just because arrears were credited late.

Example 2: Government Employee DA Hike with Retrospective Effect

Scenario:

• Ms. B is a government employee with a Basic Salary of ₹50,000.
• DA revised from 42% to 46%, effective 1 January, but credited in April.
• DA arrears for 3 months = ₹2,000 × 3 = ₹6,000.

Without Relief (arrears taxed in one year):

• Entire ₹6,000 added to current year income.
• This could push part of her salary into a higher tax slab.

With Relief (using Section 89(1)):

• Tax recalculated by adding ₹2,000 per month into Jan–Mar of the earlier financial year.
• Extra tax in earlier years is usually lower than current year extra tax.
• Hence, Ms. B claims relief by filing Form 10E arrears calculation.

Outcome: Relief reduces additional tax on her DA arrears.

Example 3: Pay Commission Revision Arrears

Scenario:

• Mr. C, a central government employee, gets arrears of ₹2,40,000 due to a Pay Commission revision.
• These arrears belong to two past financial years (₹1,20,000 each).

Without Relief:

• Entire ₹2,40,000 taxed in current year.
• His income jumps into the 30% slab, resulting in huge tax outgo.

With Relief (Section 89(1)):

• Arrears are distributed into two previous years (₹1,20,000 each).
• Tax recalculated for each year separately.
• Difference in slab impact significantly reduces tax liability.

👉 Outcome: Mr. C saves a substantial amount of tax because Section 89(1) spreads arrears across correct years.

Key Takeaway from the Examples

• Without relief → Entire arrears taxed in one year = higher slab, more tax.
• With relief under Section 89(1) → Arrears spread across relevant years = fair tax, lower burden.
• Filing Form 10E is mandatory to get this benefit.

Key Things to Remember about Salary Arrears

While salary arrears are a common part of employment, they can create confusion in payroll and taxation. To avoid mistakes, keep the following important points in mind:

1. Always check your salary slip and arrear breakup
   • Employers usually provide a month-wise arrear breakup in your payslip.
   • Cross-verify the arrear salary calculation (Basic, DA, HRA, PF, etc.) to ensure no errors.
2. Form 10E must be filed before filing ITR to claim relief
   • If you want to claim Section 89(1) relief, filing Form 10E online is mandatory.
   • Relief claimed in ITR without Form 10E will be rejected, and you may receive a notice.
3. Relief is available only when arrears increase tax burden
   • Section 89(1) benefit applies only if arrears push you into a higher tax slab or increase your tax liability.
   • If arrears don’t affect your slab, relief may not apply.
4. Keep old Form 16 and salary slips for calculation
   • To correctly calculate arrears, you need access to previous years’ salary slips and Form 16.
   • These documents help in breaking down arrears across financial years when filling Form 10E.

Understanding these arrear salary important points helps you avoid tax mismatches, ensure smooth arrears ITR filing, and secure relief without errors. Always keep proper arrear salary documents handy for accurate calculations.

Conclusion

Salary arrears are a common part of every employee’s career, whether due to increments, DA hikes, promotions, or pay revisions. In simple terms, they represent the difference between what you should have received earlier and what you actually get later. While the calculation of arrears is straightforward—comparing old vs new pay structures—their taxation can be tricky.

As per the Income Tax Act (Section 15), arrears are taxable in the year of receipt, which often increases your income suddenly and pushes you into a higher tax slab. This creates an additional tax burden. Thankfully, the law also provides relief through Section 89(1), which allows you to spread arrears across the years they belong to. By filing Form 10E correctly, you can claim this relief and avoid paying unnecessary extra tax.

Final Takeaway

Always check your arrear breakup, verify your salary slips, and keep past Form 16 documents handy. Most importantly, never forget to calculate arrears carefully and claim Section 89(1) relief via Form 10E while filing your ITR. Doing so ensures you pay fair tax—not extra tax—on your arrears income.

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