Salary Arrears in India: Meaning, Calculation, Format & Tax Rules Explained
Posted On:- 15 July, 2025 By:- Vaibhav Maniyar
Introduction
Ensuring timely salary payments is a key responsibility for employers. If you've ever received delayed salary payments – in some cases, salary components such as increments, bonuses, or revised pay structures – from your employer, you're not alone. In India, this situation where an unpaid portion carried forward and paid at a later date is quite common – and it has a name: salary arrears.
In this guide, we'll walk you through the meaning of salary arrears, how they impact your income, what legal rights you have as an employee, how to compute arrears, and how to file for tax relief using Form 10E.
What are Salary Arrears?
Definition: Salary arrears refer to payments made to an employee for work done in the past, but paid in a later period due to delays, revisions, or corrections in payroll. Late implementation of salary hikes, retrospective pay revisions, promotion-related salary differences, or payroll miscalculations are some of the main reasons behind salary arrears. These payments are typically added to your income in a later financial year, potentially increasing your total taxable income in that year.
Did you know?
When an employee's salary hike is delayed (e.g., a raise of ₹2,000 not paid in June), the arrear for that month is added to the next month's salary, resulting in a higher payment for that cycle that combines current salary plus arrears.
Arrears Meaning in Salary
Understanding the arrears meaning in salary is essential not just from a payroll perspective but also from a taxation point of view. In the context of salary, an arrear is the value of money that should have been paid in the past as salary but wasn't, due to a delay or revision. Arrear salary meaning is simple: it's the backlog of unpaid wages owed to an employee.
Let's assume Ajay was supposed to get Rs. 25,000 as his salary for January, but due to a payroll system glitch, he received only Rs. 24,167. The remaining Rs. 833 was adjusted and added to his February salary. This amount is known as arrears of salary. Most companies follow a standard arrear salary format in payslips to ensure clarity. It appears as a separate line item labelled "Arrears," "Salary Arrears," or "Adjustment Pay."
Related: 5 Basic Steps In Processing Payroll
Alternatively, if Ajay was granted a promotion in April with effect from January, and the increment was Rs. 3,000/month, he'd receive Rs. 9,000 in arrears (for Jan, Feb, and Mar) along with his April salary.
When arrears are paid in a lump sum, your total income for that year may increase significantly, possibly placing you in a higher tax bracket. But don't worry – Section 89(1) of the Income Tax Act provides a way to claim tax relief on such arrears.
| Parameter | Regular Salary | Arrear Salary |
|---|---|---|
| Payment Timing | Paid for current period | Paid for past period |
| Tax Year | Same as work period | Often a different financial year |
| Tax Treatment | Taxed in year of receipt | Eligible for relief under Sec 89(1) |
| Requires Form 10E? | No | Yes |
Arrear Salary Meaning vs. Regular Salary
Common Scenarios Where Salary Arrears Apply
1. Pay Revision After a Financial Year Ends
Let's say your company announces a salary hike in July 2025 but makes it applicable from April 2025. The salary for April, May, and June will be paid retrospectively, as arrears of salary.
2. Government Employees and 7th Pay Commission
When new pay commissions are implemented, government employees receive a revised salary structure that is often effective from a previous date. The difference between the old and new salary is paid as arrears.
3. Promotions or Correction of Payroll Errors
An employee promoted in January may receive the revised salary only in March, with the difference for January and February paid as arrears.
How to Calculate Arrears of Salary?
Arrears = (New Salary – Old Salary) × Number of Months
Here's a 5-step breakdown that employers (and employees) can use:
Step 1: Determine the months or years for which the arrears are being paid.
Step 2: Calculate salary difference for each relevant month:
Revised salary – Original salary = Monthly arrear amount
Step 3: Add up monthly differences to find the total arrear salary received.
Step 4: Add the total arrears to your current year's income.
Step 5: Use Form 10E to avoid excess tax due to lump-sum arrears.
Example:
If your basic salary was increased from Rs. 30,000 to Rs. 33,000 from January, and you receive the revised pay in April:
Monthly Difference = Rs. 3,000
Arrears = Rs. 3,000 x 3 months = Rs. 9,000
Is Arrear Salary Taxable in India?
Yes. Tax on arrears of salary is applicable because it's considered part of your income under the Income Tax Act. However, since it is paid in a lump sum and might belong to an earlier financial year, it can inflate your tax slab unfairly.
To balance this, the Income Tax Act offers relief under Section 89(1).
Claim Relief under Section 89(1)
If you receive any portion of your salary (or pension) in arrears or in advance, it may push your income into a higher tax bracket.
Section 89(1) allows you to avoid paying extra tax due to this artificial income hike. It does this by recalculating the tax you would have paid in the year the arrears pertain to and comparing it to your current year tax.
In simple words, under Section 15 of the Income Tax Act, salary is taxable on receipt or accrual, whichever is earlier. Since arrears are paid later, they are taxed in the year of receipt.
Section 89(1) offers tax relief if arrears result in higher taxable income. You must:
Compute tax on total income including arrears (current year)
Compute tax as if arrears were received in the respective past years
The difference between the two is your tax relief
How It Works:
Calculate total tax liability with arrears included.
Calculate tax liability without arrears.
Calculate the tax on the arrear amount as if it was received in the year it actually belongs to.
The difference is the relief under Section 89(1).
When and How to File Form 10E
Form 10E is the form required to submit details of income received in arrears, in advance, or as a family pension, under section 192(2A). To claim relief under Section 89(1), it is mandatory to file Form 10E online before filing your Income Tax Return (ITR).
How to File:
Log in to https://www.incometax.gov.in
Go to "e-File" > "Income Tax Forms"
Select "Form 10E"
Fill in arrear details and tax calculations for each year
Submit online
Important: If Form 10E is not submitted, your relief claim may be rejected by the Income Tax Department.
Arrear Salary and TDS
Employers often deduct Tax Deducted at Source (TDS) based on the total earnings in a month, which includes any arrears.
You can avoid overpayment by:
Informing your employer of the arrears breakup
Submitting Form 10E in advance
Consulting with a tax advisor
Related: Everything About Payroll Structure
How to Handle Salary Arrears?
Handling arrears professionally helps boost transparency and compliance. Here are some tips:
Software can automatically detect pending increments or pay revisions and update salary structures.
Always issue an increment letter with the effective date of salary revision.
Show arrears separately so employees understand their salary structure clearly.
Avoid clubbing past and present earnings blindly. Use Section 89(1) logic.
Final Thoughts
Salary arrears are a critical mechanism to ensure employees receive the full compensation they are entitled to, despite any payment delays. It is essential to maintain accurate records of arrears and complete all necessary documentation. Additionally, employees should remember to file Form 10E to claim applicable tax relief on arrears income. For comprehensive guidance, it is advisable to consult with a qualified tax professional or coordinate closely with your payroll department.
FAQs
Is it mandatory to file Form 10E for claiming tax relief on salary arrears?
Yes. The Income Tax Department has made it compulsory to submit Form 10E before claiming relief under Section 89(1).
Can I claim relief if I forgot to file Form 10E in a previous year?
No. Relief under Section 89(1) is allowed only if Form 10E is filed in the same year in which arrears are received.
Does TDS apply to arrear salary?
Yes. Employers are required to deduct TDS on the full salary paid in the year, including arrears. You can adjust this during ITR filing.
Can pensioners claim tax relief on arrears of pension?
Yes. Pension arrears are treated like salary arrears and are eligible for relief under Section 89(1).
How are arrears shown in Form 16?
In Part B of Form 16, arrears are shown under "Salary as per provisions in section 17(1)". Make sure it's reflected correctly.
Are arrears taxed at a higher rate?
Not exactly. But because they increase your total income, they may push you into a higher tax slab unless you claim relief.
What happens if the employer fails to pay salary arrears?
Employees can file a complaint with the Labour Commissioner, approach a civil court, or report to the Industrial Tribunal in case of wage disputes.
How are arrear payments made?
Salary arrears are typically paid in the following salary cycle after the missed payment is identified. They are added to the employee's regular payroll or processed as a separate payment, depending on the company's payroll process. These payments are clearly marked as "arrears" on the salary slip for easy distinction.
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