How to Pay your Income Tax on Arrear Salary

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Confusion prevails on the tax treatment of the pay arrears that Central government staff are set to get as part of their latest wage revision. While tax experts and the income tax department maintained that the entire arrears are to be taxed this fiscal (even though they would get only 40% of the arrears this fiscal), another section of the finance ministry said that they would be taxed for only what they get this year. The government had decided to pay 40% arrears of their increased salaries this year and the rest next year to reduce the burden on the exchequer. At a briefing on the implementation of the latest wage rise for central government staff, an official of the finance ministry said, “the instruction to the ministry is to deduct tax only when it is paid.” The officials, however, declined to speak on record. “Government instructions issued on August 30 regarding fixation of pay and payment of arrears consequent upon the implementation of the Sixth Pay Commission’s recommendations, clearly states that in authorising the arrears, income tax as due may also be deducted and credited to the government. Generally speaking, income earned in a year is taxed in that particular year only”, said the official. Sources in the income tax department, however maintained that law as it stands today, provides for deducting the tax on the entire amount when it is ‘allowed’, irrespective of when they actually get the money. They said that the supreme court had upheld the provision regarding this in a case of CIT versus L W Russel 53ITR91. Income Tax Act says that any arrears of salary “paid or allowed” to him in the previous year, if not charged to income-tax for any previous year, can be charged to income-tax under the head salaries. The court had in its verdict said the expression “allowed” is of wider connotation and any credit made in an employees account is covered by it. It is equivalent to find/taking into account/set apart/granted and implies that the right is conferred on the employee in respect of the perquisite, it had said. The government had last month announced an average increase of 21% in the wages of employees.

Statesman Sources:-
The government today clarified that the arrears accruing from the pay hike recommended by the Sixth Pay Commission would be taxed as and when it was given and not in a lump-sum. “The income tax as due can only be deducted on the income earned in a particular year,” a finance ministry official said, refuting reports that 100 per cent tax would be collected this year even though the arrears would be split into two installments of 40 per cent this year and 60 per cent next fiscal. Stating that no special dispensation would be made for government employees, the official said tax would be levied when a payment was made on a person’s total income that year. There would be no advance tax. The ministry also sought to dispel the feeling that defence personnel would get a lower pay scale as compared to their civilian counterparts. Asked about the Budget provisions, the official said the total impact in the general Budget was calculated at Rs 15,564 crore. Since all allowances are prospective and would be thus applicable from 1 September, the government would be able to sustain the pay hike this year.(Statesman)


Govt to levy income-tax on 40 per cent pay arrears this year (PTI)

New Delhi, Sep 3 (PTI) Government today said it would tax only 40 per cent of salary arrears to be paid to central government employees in the current fiscal on implementation of Sixth Pay Commission recommendations.Generally speaking income earned in a year is taxed in that particular year, official sources said.A section of the media today reported that the entire amount of arrears would attract tax this fiscal.As per the notification issued by the government last month, central government employees will get 40 per cent of arrears during the current financial year and the remaining amount in the next financial year.Government instructions issued on August 30, 2008, regarding fixation of pay and payment arrears consequent to implementation of the Sixth Central Pay Commission recommendations clearly states that in authorising the arrears income tax as due may also be deducted and credited to the government.The arrears with effect from January 2006 would cost Rs 29,373 crore. Of the arrears, 40 per cent would be paid during the current year to the 50 lakh employees of the central government.The revised pay scales will add Rs 4,500-5,500 crore to the government exchequer this fiscal in the form of personal income tax.Besides, some money would also come through indirect taxes as some of the increased pay would go into buying products and services, official sources said here. PTI

Govt to levy income-tax on 40 per cent pay arrears this year
Finally there is good news for 5.5 million central government employees. This year the government will tax only 40 percent of arrears that one would be getting as per 6th Pay Commission recommendations.
Earlier there were reports that government had decided to tax the whole arrear despite the fact that only 40 percent of the arrears was being paid this year. The news had shattered many a hopes of government employees, but now they are a bit optimistic that they may well at last be able to spend a part of their arrears amount they would be handed over as part of sixth pay commission recommendations.The government had divided arrears in two installments with central government employees getting 40 percent amount of the arrears this year and the rest 60 percent next year.Sources in the finance ministry say that the ministry may not deviate from the general practice where tax is charged only on an income from that year and not what he would get next year.Government instructions issued on August 30, 2008, regarding fixation of pay and payment arrears consequent to implementation of the Sixth Central Pay Commission recommendations clearly states that in authorising the arrears income tax as due may also be deducted and credited to the government. The arrears with effect from January 2006 would cost Rs 29,373 crore. Of the arrears, 40 per cent would be paid during the current year to the 50 lakh employees of the central government.
Had the government decided to go this way it would have wiped out almost the entire amount of 40% arrears to be paid to central government employees this year. Senior bureaucrats will suffer the most as their tax would be topped with a surcharge of 10%, applicable on an income of Rs 10 lakh and above.The financial implication of Pay Commission on the General Budget would be Rs 15,717 crore and Rs 6414 crore on Railway Budget in 2008-09. The government’s present salary bill is over Rs 70,000 crore and the pension bill is over Rs 30,000 crore.