The Hindu Business Line : Salary arrears

The decision of the Cabinet to hike the pay of Central Government employees, after some modification to the recommendations of the Sixth Pay Commission, is a welcome relief for the salaried class in the present context of rising prices, especially of essential commodities.

It has been stated that the arrears of Rs 29,000 crore would be disbursed in two instalments — 40 per cent in the current fiscal and 60 per cent in the next financial year.

If the arrears due to the employees are quantified and 40 per cent is paid, whether the employees have to admit only the amount actually received as income for tax purposes for the current fiscal and offer the balance 60 per cent only on receipt, is a debatable issue.

Salary income is taxable the moment it is due from an employer or a former employer regardless of whether it is actually paid or not. This is how the statute deals with taxation of salary income.

If the employer has quantified salary arrears from January 1, 2006 to August 31, 2008, but disburses only 40 per cent in the current financial year, employees face the following dilemmas.

Dilemmas

Employees have to admit the salary arrears in full though in reality they may receive only 40 per cent in the current financial year. Unless the law provides for relief by means of a specific provision, the statute, as it stands today, would require them to cough up a substantial portion of arrears as tax. The maximum liability would be 30.9 per cent of the arrears.

Yet another alternative available for the employees is to seek relief by spreading the salary arrears to the respective years to which they relate and pay tax as per the rates applicable to those years.

This optional benefit prescribed in Section 89 would also go unutilised in most of the cases as the tax rates have been moderated for the current year income and the back years’ allocation of income would only increase their tax liability because of low exemption limit and higher tax rates.

Only in cases where the employees had income below the taxable limit in the preceding years, the allocation of arrears to those years would bring some tax saving because of Section 89.

Relief

In the current high inflation situation, the disbursement of such high levels of salary arrears would increase the deficit burden of the exchequer. However, the employees would be happy that the arrears are paid to them and not credited to the provident fund account, which would not have benefited them immediately.

It may be recalled that less than a decade ago, the teaching profession had got salary arrears, of which, a substantial portion was credited to their provident fund account which could not be used for tax relief when it exceeded the prescribed monetary ceiling.

As the salary arrears would be paid in the current financial year, the Finance Ministry should clarify at the earliest that only the actual amount of arrears received by the employees would be chargeable to tax. This could be done by inserting a proviso to Section 15 in the next Budget with retrospective effect (which is often resorted to), to give the intended benefit and relief to the Central Government employees.

(The author is an Erode-based chartered accountant. Reponses to blfeedback@thehindu.co.in)

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