How to Calculate Income Tax on Arrear Salary?

I will guide you straight to the point. Arrears are sums that must be paid in order to cover salaries that were not paid when they were due. When you as an employee receive a wage increase in one month but not the following month, they are paid in arrears. Arrears refers to the sum that is owed in this situation but is paid at a later time. I will explain how to calculate income tax on arrear salary.

How to calculate income tax on arrear salary with example?

The entire amount of money received or collected during the year is used to compute taxes. You could be concerned about paying a greater tax on any previous dues that were paid in the current fiscal year. It can be done if your total income contains them. Therefore, the tax law enables a relief under section 89 to spare you from the cost of tax. Because of a delay in receiving income (1).

Let's assume that employee X earned Rs. 3 lakh in back pay for the fiscal years 2015–2016, 2016–2017, and 2017–2018 in the 2018–2019 financial year.

Let's say that he would have contributed a tax of Rs. 30,000 under normal conditions. But when arrears are added in, his tax obligation rises to Rs. 60,000.

Let's also assume that for the fiscal years 2015–2016, 2016–2017, and 2017–2018, employee X paid taxes of Rs. 31,000, Rs. 32,000, and Rs. 33,000, accordingly. The tax obligations would have been Rs. 36,000, Rs. 38,000, and Rs. 40,000, accordingly. He must have earned the income in the year they remained payable. This information is used to determine the employee's possible tax deduction.

It should be observed that the provisions of Section 89(1) do not apply if the tax due in the year of receipt is less than the tax due in years prior. In other words, no relief is allowed if the taxpayer is not subjected to an extra tax as a result of receiving arrears.

I hope you understood how to calculate income tax on arrear salary.

Tax season is approaching and I'm sure a lot of people like you would like to know how to calculate arrears of salary for income tax. Calculating income tax on arrears salary in India involves a specific method outlined by the Income Tax Department.

• Identify the financial years for which the arrears are being received. Arrears can be for one or multiple previous financial years.

• For each financial year in which arrears are received, calculate the taxable income as per the applicable tax rates and slabs for that year. Include any deductions and exemptions applicable for that year.

• Determine the tax liability for each financial year without considering the arrears. This will give you the tax liability that would have been applicable if the income had been received in the respective years.

• Add the arrears income to the respective financial years and recalculate the tax liability for each year considering the additional income. Ensure you apply the tax rates and slabs for each specific year.

• The additional tax payable due to the arrears is the difference between the tax liability with arrears and the tax liability without arrears for each financial year.

• Sum up the additional tax payable for each financial year to get the total additional tax liability due to the arrears.

• If the arrears pertain to more than one financial year, you may be eligible for relief under Section 89(1) of the Income Tax Act, which aims to reduce the tax burden arising from the receipt of arrears. The relief is calculated based on a formula provided by the Income Tax Department.

• Finally, calculate the total tax liability by adding the regular tax liability for the current financial year (if any) to the additional tax payable due to the arrears.

After calculating the total tax liability, ensure that you file your income tax return accurately, mentioning the arrears received and the corresponding tax calculations.

Moreover, for your income tax calculation on arrear salary, you can also use the

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This is how to calculate arrears of salary for income tax.

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