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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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Author: KVWALTAIR
Mar 03, 2009

INCOME TAX - ARREARS 40% NOT PAID- WHETHER TO PAY INCOME TAX THIS YEAR OR TO BE

if 40% arrears are not paid during the financial year 2008-2009, whether the tax liability for 40% is to be paid in this year only or not. please clarify.

Author: raagvamd
Mar 03, 2009

Re: INCOME TAX - ARREARS 40% NOT PAID- WHETHER TO PAY INCOME TAX THIS YEAR OR TO BE

Hi,

Tax is payable on any income that is paid to you or is due to you, whichever is earlier.

Since the 40% arrears are sue to you in 2008-09, the amount would be taxable even if it is not actually paid out to you.

However, I believe the this amount is to be actually paid out in 2008-09 (that is, before March 31st 2009). So, there should not be any confusion.

Moreover, if the government fails to pay this amount, it might come out with a clarification about the taxation of such unpaid amount.

Author: Sushil
Mar 09, 2009

will Arrear basic add for hra rebate of non paid hra

will Arrear basic add for hra rebate of non paid hra?

Author: raagvamd
Mar 09, 2009

Re: will Arrear basic add for hra rebate of non paid hra

Hi Sushil,

I am not sure if I understand your question correctly.

If you are asking if an increased HRA exemption can be claimed as a result of increase in basic for the previous years (say due to retrospective hike in salary), then yes, it can be done.