Salary arrears: How to calculate arrears and tax relief in India

A salary revision is effective from April, but the revised amount doesn't make it into payroll until June. The employee receives the difference in June along with their regular salary.

That difference is salary arrears.

Arrears can arise whenever salary that was due for an earlier payroll period is paid later. A delayed salary revision is one of the most common examples, but corrections to payroll calculations and other changes to an employee's pay can also result in arrears.

The calculation is usually straightforward: work out what the employee should have received, compare it with what was actually paid, and pay the difference. The tax treatment needs a little more attention, particularly when the arrears relate to an earlier tax year.

This guide explains how salary arrears work, how to calculate them, how they are taxed, and how employees can claim relief when receiving arrears increases their tax liability.

Tax update: From 1 April 2026, the Income-tax Act, 2025 applies to Tax Year 2026-27 onwards. The provision corresponding to the earlier Section 89 is now Section 157, and Form 39 has replaced Form 10E for claiming relief under the new Act. For income governed by the Income-tax Act, 1961, including Assessment Year 2026-27, Section 89 and Form 10E continue to apply.

What are arrears of salary?

Salary arrears are payments owed to an employee that were delayed or not paid in a previous payroll cycle.

For example, suppose an employee's monthly salary is ₹50,000. Their salary is revised to ₹55,000 with effect from April, but the revision is processed only in June.

The employee should have received an additional ₹5,000 for April and another ₹5,000 for May.

So, in June, the employee receives:

• Regular June salary: ₹55,000
• April arrears: ₹5,000
• May arrears: ₹5,000
• Total gross salary for June: ₹65,000

The ₹10,000 difference relating to April and May is salary arrears.

Under the Income Tax Act, salary arrears are included in the income of the tax year in which they are received, if that amount has not already been taxed in an earlier tax year.

Why do salary arrears arise?

In India, several situations may result in a company paying employees salary arrears, such as appraisals, procedural delays, or other administrative issues.

Here are some common scenarios where employees may receive arrears:

• Salary revisions

Many companies follow a systematic procedure for revising salaries, which includes budgeting, determining the percentage increase, and communicating the revised salaries to employees. These steps take time and can lead to delays in the salary revision process.

Once completed, companies calculate salary arrears based on the month the revision took effect and pay the arrears in the next payroll cycle.

Learn more about the salary revision process.

• Reimbursements

Arrears may arise when a company hasn't yet reimbursed an employee for expenses made on its behalf. These delays often occur due to discrepancies in the submitted proof, but once resolved, the reimbursement is processed smoothly.

• Attendance

Sometimes, errors in recording an employee's attendance during a salary cycle can result in arrears. In such cases, the company will adjust and compensate the employee with  the correct amount in the next month’s salary.

Standing arrears meaning

In payroll management, standing arrears refer to unpaid amounts that are owed to employees but have not yet been disbursed. These may arise from missed payroll deadlines, temporary cash flow challenges, or administrative oversights.

For example, if regular allowances or bonuses owed to an employee are not paid for several months, the accumulated unpaid amount becomes standing arrears. In certain regions, employers may be required to pay interest on delayed wages to ensure fairness and statutory compliance.

How are salary arrears calculated?

You can calculate salary arrears by comparing what the employee should have received with what they actually received for each affected payroll period.

Step 1: Identify the period affected

Start with the date from which the salary revision or correction should have taken effect.

For example, if a salary revision is effective from April but processed in June, April and May are the affected months.

Step 2: Calculate the salary that should have been paid

Work out the employee's revised salary or corrected earnings for each affected month.

Step 3: Compare it with the salary already paid

Subtract the amount already paid from the amount that should have been paid.

Arrears for a period = Correct salary for the period - Salary already paid

Step 4: Add the arrears for all affected periods

If the correction covers more than one month, calculate the difference separately for each period and add the amounts together.

Example: Salary revision effective from April

An employee's salary increases from ₹50,000 to ₹60,000 per month with effect from April. The revised salary is implemented in July.

The monthly difference is:

₹60,000 - ₹50,000 = ₹10,000

Arrears for April, May, and June:

₹10,000 × 3 = ₹30,000

The employee's July payroll would therefore include:

The ₹30,000 arrears should also be identified separately in the payroll records or payslip so the employee can see what relates to the earlier months.

How are salary arrears paid?

Salary arrears can be paid through the next regular payroll or through a separate payroll payment, depending on the employer's payroll process.

If they are included in the regular payroll, the arrears should be identifiable separately from the employee's current-period salary.

This matters for more than just the payslip. The arrears also need to be considered when calculating the employee's taxable salary and TDS for the relevant tax year.

Are arrears of salary taxable?

Yes. Salary arrears are taxable. The key point is when the arrears are received and whether they have already been taxed.

Under the Income Tax Act, 2025, salary arrears received during a tax year are chargeable to tax in that tax year if they were not already charged to tax for an earlier tax year.

So, if ₹30,000 of salary arrears relating to an earlier period is paid to an employee in Tax Year 2026-27 and that amount was not taxed earlier, it forms part of the employee's taxable salary for Tax Year 2026-27.

This can create a problem when the arrears relate to an earlier tax year.

The employee may end up paying more tax because the arrears are added to their current-year income, even though the salary economically relates to an earlier year.

That's where tax relief for salary arrears comes in.

What is tax relief on salary arrears?

Tax relief is intended to reduce the additional tax burden that can arise when salary relating to an earlier period is received later.

Under the Income Tax Act, 2025, Section 157 provides relief when an employee's total income is taxed at a higher rate because of certain receipts, including salary received in arrears or advance and salary for more than 12 months in a tax year.

The provision essentially compares the tax impact of receiving the additional salary in the year it was actually received with the tax that would have applied if the salary had been taxed in the year to which it relates.

If the calculation results in an additional tax burden, the difference can be available as relief, subject to the applicable rules.

How is tax relief on salary arrears calculated?

The calculation under the new rules follows the same basic principle of comparing the tax burden in the year of receipt with the tax that would have applied if the additional salary had been taxed in the year to which it relates.

A simple example

Suppose an employee receives ₹1,20,000 in salary arrears during Tax Year 2026-27. The amount relates to an earlier tax year.

The employee's tax liability for 2026-27 is calculated including the ₹1,20,000 arrears. A separate calculation determines what the tax impact would have been if the ₹1,20,000 had been received in the earlier tax year.

If the tax attributable to the arrears in the year of receipt is higher than the additional tax that would have applied in the earlier year, the difference can qualify as relief under Section 157, subject to the prescribed calculation.

The exact amount of relief depends on the employee's income and applicable tax rates for each relevant tax year.

What is Form 39?

For Tax Year 2026-27 onwards, employees claiming relief under Section 157 use Form 39.

Form 39 is the new form prescribed under Rule 73 for claiming relief on additional salary received in arrears or advance, as well as certain other eligible receipts such as gratuity, retrenchment compensation, and commutation of pension.

The new form includes structured computation tables, making the calculation more explicit than the earlier Form 10E.

What about Form 10E?

Form 10E still applies to relief under the Income Tax Act, 1961.

If an employee is filing a return for Assessment Year 2026-27, which relates to income for FY 2025-26, the old Income Tax Act, 1961 applies. The employee would use Form 10E to claim relief under Section 89.

For income relating to Tax Year 2026-27 onwards, relief is governed by Section 157 of the Income Tax Act, 2025 and the corresponding Form 39.

So, the form depends on the tax year to which the income relates, not simply the date on which the employee happens to file the form.

Common mistakes when processing salary arrears

• Treating all delayed payments as salary arrears

A delayed reimbursement or expense payment isn't automatically salary arrears.

Salary arrears relate to salary that was due for an earlier period but is paid later. Other delayed payments should be classified according to their actual nature and the applicable tax treatment.

• Calculating arrears only for the current month

If a salary revision is effective from April but implemented in July, the arrears may relate to April, May, and June.

Calculate the difference for each affected period rather than applying the difference only to the month in which the revision is processed.

• Applying the new salary to the entire arrears period

A salary revision may not apply to every month in the same way. Check the effective date and any changes to the employee's salary during the affected period before calculating the arrears.

• Forgetting the tax year

An arrears payment can relate to more than one tax year. This matters when an employee wants to claim tax relief because the relief calculation requires the arrears to be attributed to the tax year or years to which they relate.

• Treating Section 157 relief as an exemption

Salary arrears remain taxable. The relief is designed to address the additional tax burden that can arise because salary relating to an earlier period is received later. It does not make the arrears tax-free.

• Using Form 10E for Tax Year 2026-27

For tax years governed by the Income Tax Act, 2025, the relevant form is Form 39, not Form 10E. Form 10E remains relevant for relief under Section 89 of the Income Tax Act, 1961.

Can payroll software calculate salary arrears?

Yes, payroll software can help calculate arrears by applying a salary revision or other adjustment to the affected payroll periods and determining the difference between the old and revised amounts.

With Zoho Payroll, you can process salary revisions and calculate the resulting arrears as part of payroll. The arrears can then be included in the employee's payroll along with the applicable salary calculations and deductions.

Frequently asked questions on salary arrears

• Are salary arrears taxable in India?

Yes, salary arrears are taxable. If they were not taxed in an earlier tax year, they are generally included in the taxable salary of the tax year in which they are received.

• How are salary arrears calculated?

Salary arrears are calculated by finding the difference between what the employee should have received and what they actually received for each affected payroll period. The differences are then added together.

• What is Section 89 for salary arrears?

Section 89 of the Income Tax Act, 1961 provided relief when salary was received in arrears or advance and the resulting income was taxed at a higher rate than it otherwise would have been. For Tax Year 2026-27 onwards, the corresponding provision is Section 157 of the Income Tax Act, 2025.

• What is Section 157 of the Income Tax Act, 2025?

Section 157 provides relief when an employee's total income is taxed at a higher rate because of specified receipts, including salary received in arrears or advance and salary for more than 12 months in a tax year.

• Can employees claim tax relief on salary arrears?

Yes, where the employee meets the conditions for relief. The employee needs to attribute the arrears to the relevant tax year or years and follow the prescribed calculation and filing process.