Tax on Arrears of Income

Question

I have to receave pending salary of 7 years back with the suprime court order that is about 5 to 6 lac. I want to know will the employeer deduct the TDS and How I can save income tax on above pending salary.

Answer

Arrears of income is taxable either in the year of receipt if not taxed in the year of accrual. For example if an arrear of salary for the year 2005-06 is received in the year 2009-10 and if tax has not been paid in the year 2005-06 then it will be offered for tax in the year 2009-10.

However exemption under section 89 read with Rule 21A(2) can be claimed as under.

If an assessee receives an income due in the year 1 (not offered for tax in year 1) in year 6 then exemption under section 89 can be claimed as below

A) Calculate in year 1 tax payable "without" including the Arrear amount
B) Calculate in year 6 tax payable including the Arrear Amount
(This is "receipt" method of accounting)

C) Calculate in year 1 tax payable including the arrear amount
D) Calculate in year 6 tax payable "Without" including the Arrear Amount
(This is "Accrual" method of accounting)

Calculate : A+B & then C+D. The excess of A+B over C+D is the exemption limit. If C+D is higher than A+B then there is no exemption.

Regards
S Saravanan
http://ssaravanan-vvu.blogspot.com/