Salary Arrears

What is Salary Arrears?

Salary arrears arise when an increment, promotion, or pay revision is approved later than the effective date. If your appraisal is effective April but the new salary kicks in only in July, you get three months of arrears in the July paycheque. Arrears are fully taxable in the year of receipt, even if they relate to earlier years. To avoid a tax shock, Section 89(1) lets you spread arrears notionally over the years they relate to and pay tax at the rates of those years, then take the lower of the two figures. You file Form 10E on the income tax portal to claim this relief. Without Form 10E filed before your return, the relief is denied.

Formula: Arrears = (New monthly salary - Old monthly salary) x Number of months of back pay

Example

Old salary ₹50K, new salary ₹60K, effective from April, paid in July. Arrears = (60K - 50K) x 3 months = ₹30K added to July gross.

How Salary Arrears is used

Process arrears as a separate earning line so it is visible on the payslip. Generate Form 10E support data for employees who want to claim 89(1) relief.

Salary Arrears FAQs

Are arrears taxable?

Yes, in the year you receive them, regardless of which year they relate to.

How can I reduce tax on arrears?

Claim Section 89(1) relief by filing Form 10E on the income tax portal before filing your return.

Will my employer help with Form 10E?

Most payroll teams give you the year-wise breakup. The Form 10E filing is your responsibility.