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Only paid out arrears to be subject to TDS for government employees

There were conflicting reports about the TDS on the arrears to be paid to central government employees as a result of the implementation of the sixth pay commission.

The department of income tax has made clarifications.



The salary of central government employees has been increased as per the recommendation of the sixth pay commission. This pay hike is effective from 1st January, 2006.

This means that all the government employees would be receiving huge arrears.

(Are you a government servant who would be receiving arrears? Utilize it wisely to improve your financial health instead of splurging. Please read “Don’t blow away a windfall – Smart ways to spend your bonus and arrears” for more)

Since this means there is a huge liability on the government, it has decided to give the arrear amount in two parts: 40% of the amount would be paid out this year, and the remaining 60% amount would be paid out next year.


This had resulted in huge confusion about the income tax treatment of these arrears: Would the employees be required to pay income tax for this year only on the 40% of the arrear amount that would be disbursed this year, or they need to pay the tax on the full amount, although 60% of it would be paid next year?

The income tax department has clarified through a circular that the tax liability for this year would be only on the arrear amount that is actually paid out.

Thus, the government would cut the tax deducted at source (TDS) only for the 40% amount paid out this year.

The TDS would be applied on the remaining 60% amount next year, when that amount is actually paid.

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