Salary Arrears & Taxation

I am discussing one real life case study for the benefit of many , who are facing similar dilemma and uncertainty.

Mr. X an employee of PSU received arrears in salary for last 5 years on recommendation of Fifth Pay Commission. His figures are as under: Mr. X received two arrears as follows:-

Total Amt.

Split up of the arrears on year to year basis is as under:-

No.	Year	Taxable Income Original	1 ARR	Computed IT	Savings U/S 88 20%	Net IT
1	95-96	58762	1900	752	885	0
2	96-97	71200	12067	2340	2363	0
3	97-98	101374	13449	6275	6451	0
4	98-99	110410	15001	8082	4238	3844
5	99-00	179465	8316	21839	14000	7839
			50733

As per the provisions of Income Tax Act., assessee gets benefit of distribution of income to respective years and then re- calculations to arrive at the net revised tax liability.

Income Tax Act also prescribes method or recalculation as under:

1. Calculation of tax on Gross income including arrears for the year in which the same is received (AY1999-2000)
2. Calculation of tax on Gross income excluding arrears for the year in which the same is received(AY 1999-2000)
3. Difference between 1 & 2
4. Calculation of tax on Gross income excluding arrears for the year relating to which arrears relates (AY1995-96 and onwards)
5. Calculation of tax on Gross income including arrears for the year relating to which arrears relates (AY1995-96 and onwards)
6. Difference between 5 & 6
7. Excess of amount in 3 over 6 is the amount of rebates assessee is entitled.

We will see all the steps one by one:

Step 1
No.	Year	Taxable Income original	1 ARR	Gross Income	Computed IT	Savings U/S 88	Net IT
1	99-00	179465	50733	230198	38560	14000	24560
Step 2
1	99-00	179465	8316	187781	24334	14000	10334

Step 3 Difference between 1 & 2 = Rs. 14226/-

Step 4

No.	Year	Taxable Income original	Computed IT	Savings U/S 88	Net IT
1	95-96	58762	752	885	0
2	96-97	71200	2240	2360	0
3	97-98	101374	6275	6451	0
4	98-99	110410	8082	4238	3844
5	99-00	179465	21839	14000	7839
	-	-	-	-	11683

Step 5:

No.	Year	Taxable Income	Computed IT	Savings U/S 88	Net IT
1	95-96	60662	1132	885	247
2	96-97	83267	4890	2360	2530
3	97-98	114823	8964	6451	2513
4	98-99	125411	11082	4238	6844
5	99-00	187781	24334	14000	10334
-	-	-	-	-	22468

Step 6.

Difference between 4 & 6 = Rs.10785/-

Step 7 :Excess of 3 over 6 = Rs. 3441/-

So, by computing arrears in salary in the above manner , assessee can avail tax benefits. Next time when you receive arrears in Salary , don't worry about tax , just enjoy. Taxman wont give you extra burden!!.