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In this article, I am going to write on “ARREARS OF SALARY – DEFINITION & TAXABILITY.” Hope it will be helpful to all of you.


Salary due from an employer or former employer which has not been paid or charged to tax in the previous year, it constitutes “Arrears of Salary”. As per the provisions of Income Tax Act 1961, if salary allowed & paid to employee on behalf of employer or former employer is not taxed in previous year, then it will be charged to tax in the given year under the head “SALARIES”. In other words, it will be taxable in the year of payment in which arrears are paid.

Relief under the Act :

The arrears of salary due to past service could lead to higher tax incidence as a result of being charged in the given year. This is due to progressively increasing tax slab rates. A change in income tax slab rates results in corresponding increase in income tax and surcharge. This could bring higher tax incidence on employee which is unfair to the employees.

The provisions of section 89 of the Income Tax Act brings relief in this context as they allow a tax deduction for this additional tax burden on employees due to receiving arrears of salary. The objective of this section is to mitigate the hardship caused because of this higher tax incidence due to increasing slab rates. The benefit of this section is available to every employee irrespective of the fact that he works in government or private sector.

Basically the relief under section 89 (1) involves ascertaining two amounts of tax. The first is the amount of tax applicable on total income including the arrears of salary in the year of receipt. The second is the amount of tax by adding the arrears in the total income to which they relate. The difference between these two amounts is the deduction allowed to the employee. In other words, such additional tax which the employee need to pay due to this higher tax incidence can be reduced from the tax payable.

Accordingly the taxpayer can claim relief in the return of income of the Financial Year in which the arrears are received.



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