Understanding Salary Arrears and the Process of Paying Pending Salary

Salary arrears are complex. HRs need to calculate multiple complex parameters to ensure that arrears are paid on time. Whenever there was a delay in payment of employee salary or miscalculation, it reflects in the salary slip format, and needs to be paid in arrears.

Salary arrears are the unpaid salary, which are paid in the next salary cycle. Salaries can remain unpaid due to multiple reasons, such as delays in the payroll process, an employee receiving a raise, errors in attendance records, etc.

It is generally used concerning periodic payments such as bills, salaries, rents, royalties, etc. In this context, the term ‘salary arrears’ refers to the payment compensating the employees’ salaries that should have been paid earlier.

We will be discussing the various aspects of salary arrears in India, in this article.

Scenarios for Salary Arrears

There are several scenarios in which a company will be required to compensate their employee with the help of arrears, in India.

Although some of these instances result from human errors while processing and disbursing payroll, some might result in delays related to bureaucracy.

It is also possible that there might have been a wrong or insufficient payment to the employee due to mismatch of documents or misinformation.

In such cases, the amount under question is kept with the company until such disputes are resolved. Such safeguards ensure that others do not take undue advantage of any errors.

Some of the common scenarios for the employees to receive arrears are:

Salary Components

The company may have missed paying the employee some component of the salary the employee is legally eligible to receive.

It might occur in the cases of dynamic components of the salary such as bonuses, incentives, etc. In such cases, the employee is paid the pending amount via arrears in their next month’s salary.

Reimbursements

Another common scenario is when the company cannot reimburse the employee for some expense undertaken on their behalf.

Delays in payment of reimbursements usually happen in cases where there might be some discrepancy in the proof of charges or delays in processing the payments on time.

Attendance

Arrears might also be required in cases where there may have been a wrong tally of the number of days the employee was present in the company for a salary cycle.

In such cases, the employee will be paid their entitled salary and the next month’s salary in arrears.

Additional Payment

Another major issue happens when there are errors with the calculation or disbursal of dynamic payments such as bonuses, incentives, etc.

Such matters would lead to decreased trust in the company. Hence, it is essential to ensure these payments are made in the next salary cycle in arrears.

Overtime Payment

It is another cause of concern for the employee when they are not paid the overtime salary to which they are entitled. It causes additional emotional damage realizing that your employer has not paid for the extra efforts you put in for your company.

Even in such cases, arrears help remove the feeling of distrust the employee may develop knowing that their company has paid for their extra efforts. It revitalizes that their employer has not forgotten their contribution and values them.

Processing Salary Arrears

Calculating the arrears of the employee’s salary is a critical step in arrears disbursal as the employee receiving the arrear has already undergone an unpleasant experience with the company. Hence, care must be taken to ensure they do not have a bad experience again.

To calculate the arrears, you need to consider the following parameters:

• Find the exact basic salary amount for the concerned employee.
• Find the exact amount that an employee was supposed to receive at the end of the last salary cycle
• Cross-verify the amount with the actual amount that the employee received.
• The difference between these amounts should be paid in arrears to the employee in the current salary cycle.

Consider an example where an employee’s salary was hiked from ₹50,000 to ₹55,000 in the last salary cycle. However, due to some calculation error, the hike amount was not paid to the employee.

In this case, the employee is bound to receive the current month’s salary (₹55,000) and their hike amount (₹5,000) as an arrear. Hence, the employee will be receiving ₹60,000 this month as salary.

Paying Salary Arrears

Salary arrears are usually paid in the next salary cycle to which any component of the salary was not given. It is essential to pay the employees their arrears at the earliest since the payment was already delayed.

Human errors may be unavoidable in processing payroll, but having the option to provide arrears significantly increases the employee’s trust in their company.

Although they would not like the fact that the amount was not paid at the end of the correct salary cycle, they would still understand that their company corrects its mistakes by paying the amount in arrears.

Using Form 39 in the Arrear Payment Process

Form 39 helps the taxpayer avoid paying extra income tax on arrears or advance salary, as these are not considered part of their standard income. This tax relief under section 157(1) of the Income Tax Act, 2025, ensures taxpayers do not incur additional tax payable on the total income earned or received during the financial year, through arrears and advance salaries.

It is mandatory to fill the Form 39 to ensure that you avail the tax benefits. It needs to be filed before filing the Income Tax Return and can be submitted online only. All registered taxpayers can avail of the benefits of Form 39 to claim relief under Section 157(1) of the Income Tax Act of 2025. The Form 39 is divided into 2 parts:

1. Part A: It covers basic taxpayer details and the tax year for which relief is claimed.
2. Part B: It covers details of receipts like additional salary, gratuity, retrenchment compensation, and commutation of pension, with computation tables and auto-populated relief.

Conclusion

Arrears play a vital role in maintaining the employees’ trust in their company. It acts like a rectification system that helps correct human errors that may have led to miscalculations and payment delays. Since salary is one of the critical factors in any employee’s satisfaction index, arrears help ensure that it does not decrease.

Arrears are like a safety net to ensure that the employees are paid their salaries, even though they will be getting it with a delay. However, it is still better than having no safety net. It also gives the employee additional time if the issue happened due to negligence or mistake. In both cases, they can rectify the problem by discussing the options with their HR and undertaking the required formalities.