Salary deficit or arrears of salary are abstrued. As HRs are required to calculate multiple parameters for ensuring that the arrears are paid on time. When there is a delay in payment of the employee’s salary or any miscalculation it need to paid the arrears.
Although its easier to say than to do as these deficit calculation require manual entry calculations depending on these situations.
Procedure to clear these salary arrears is much important for improving trust and the morale of employees. It also increases the employee’s confidence which helps in understanding that the company will make sure that the salaries are paid even when there is human error this might have issue in compensation which is being paid.
What is Salary Arrears?
‘Arrear’ as a legal term means ‘the part of a debt overdue’ after missing one or more required payments. Its generally used for payments such as salaries, bills, rents, royalties, etc. the ‘salary arrears’ refer to payment for compensating employee’s salary which should have been paid earlier.
General Example of Salary arrear is an employee’s monthly salary increase which was not given on time. The employee receives the increased amount in next month rather than in the same month. Here, we can say that employees were paid the arrears of their wages.
A general consensus in regard with this term is the payment which the company pays the employee for missing the payment at the right time. It can occur due to various scenarios which we discuss later. Cause of this missed payment employee are bound to receive the amount as dues from the company cause of the delay in receiving income.
Situations for Salary Arrears
There are some scenarios in which any company is required for compensating the employee with the aid of arrears. Although some of these situations result from human error. While processing and disbursing the funds, some delays could be there cause of administration issues.
Its possible that there could be a wrong or insufficient payment made to the employee due to a mismatch of document or cause of any misinformation. In these type of situation, the amount is kept with the company till such issues are resolved. Such protection ensures that other do not take any undue advantage of any sort of errors.
Some common situation for employees to seek the dues are:-
Salary Components
The Company could have missed paying the employee some component of Salary as the employee is eligible to receive the dues.
It can happen in cases where are multi components of salary such as bonuses, incentives, etc. the employee is paid the pending amount via arrears in their next month’s salary.
Reimbursements
Another Scenario is when the company is not reimbursing the employee for any expense which is done on their behalf. Delay in payment of reimbursement generally happen in cases where there might be some discrepancy in proof of charges or delay in processing the payments on time.
Attendance
Arrears can happen there also when there is a wrong tally of number of present days of employee in the company. In these type of cases, employees will be paid their salary and next month salary in the arrears.
Additional Payment
Another issue which happens when there is any error with calculation or disbursement of payments such as the bonus, incentives, etc. Such matters lead to less trust in the company. So, its essential to make sure these payments are made in next salary cycle.
Overtime Payment
Its another concern for employee’s when they are not paid the overtime salary to which they are required to. It hurts them with emotional damage realising that the employer is not paying for the extra efforts you put in the company.
Even in these type of cases, arrears will help in removing the distrust the employee have developed by knowing that the company has paid for the extra efforts. It revitalizes that employer has not forgotten their contribution and values them.
Processing Salary Arrears
Calculating Arrears of the employee’s salary is an important step for dues disbursal as employee receiving these arrear have already under went an unpleasant experience with company. So, should be taken for ensuring they do not have bad experience.
For calculating the arrear, following parameters are needed to consider:-
- The exact basic salary amount of the concerned employee
- The exact amount that an employee was supposed to receive at the end of the last salary cycle
- Cross-verifying the amount with actual amount that employee received.
- The difference between these amounts should be paid in arrears to employee in current salary cycle.
Paying Salary Arrears
Arrears of Salary are generally paid in next salary cycle for which any component of salary was not provided. Its essential to pay the employee their arrears at earliest as the payment was already delayed.
Human errors are unavoidable in processing the payroll, but having an option to pay the dues increases the employee’s trust in the company significantly. Howsoever, it would like the fact that the amount was not paid at end of correct salary cycle, they will understand that the company has corrected its mistakes by paying the arrear amount.
Using Form 10E in Arrear Payment
Form 10 E helps the taxpayer by avoiding to pay extra Income tax on the dues or the advance salary, as it is not considered as part of the standard income. Under Section 89(1) it ensures that the taxpayer do not incur any additional tax which could be payable on the total income earned or received during the financial year, by arrears and advance salaries.
Its mandatory for filling the form 10E for ensuring that you get the tax benefits. It also needs to be filed before filing the Income Tax Return and could be submitted online. All the registered taxpayers could avail the benefits of form 10E for claiming relief under the Section 89 of Income Tax Act, 1961. This form 10E is divided in seven parts:-
Personal information: PAN and contact details of employee
- Annexure I (Arrears) – Details of salary or Family Pension received in arrears
- Annexure I (Advance) – Details of salary or Family Pension received in advance
- Annexure II & IIA (Gratuity) – Details of payments in nature of a gratuity
- Annexure III (Compensation) – Details of payments in nature of compensation from employer or previous employer.
- Annexure IV (Pension) – Payment in commutation of pension
- Declaration of authenticity of data provided.
Relief under Section 89(1)
As the tax is calculated on total income earned or received in current financial year. They might face issue with arrears which you receive from financial year before the current one. You will incur additional tax burden on salary arrears in the year you receive these arrears.
As an individual you could be concerned about paying an additional tax on the salary since dues are a form of taxable income, it might lead to shift to a different tax bracket from a low tax bracket for the year which you get it. For removing this fear, the Income Tax department has special provision under Section 89(1) of Income Tax Act, 1961.
Conclusion
Arrears have an important role in maintaining the trust of employees in the company, It acts as a rectification system which helps in correcting human errors which can lead to miscalculations and delayed payments. As, salary is one of critical factors in any employee’s satisfaction Index, arrears help in ensuring that it does not decrease.
Arrears are a safety gear for ensuring that the employees are paid the salaries, even when they will be getting it by delay. Although, its still better than having nothing. It also gives the employee additional time if this issue happens again due to negligence or any mistake. So, they can rectify the problem by discussing the options with HR and undertaking the required formalities.
