Brief Understanding About Arrear Payments

An enterprise runs smoothly when their financial system is in place from salary and overtime to bonus and incentives, its everyday hustle with numbers. The more employees you have, more grievances you have to deal with. In millennial times, a well-designed payroll system comes to a rescue where suddenly mismanaged system starts to find ground and things fall in place automatically. You must think such a payroll system seems like a magic wand but it is nothing less than a magic wand for current workspace.

While salary slips, health benefits, loans, tax deducted, EPF, gratuity, incentives, reimbursements and so on are talked about at length; not much is known about arrear payment.

Now you would ask what the heck are arrears?

Arrear payment is money earned by the employee and is overdue for sometime due to various reasons. Such payments happen usually when employee salaries are hiked.

Say for example, Management hikes the salary in the month of June but it is applicable from April month onwards, so the employee till now has received his old salary for April, may and June. In the month of July, he may get his overdue salary that was promised at the time of salary hike and that lump sum payment is known as arrear in payroll payment that the employee receives in July month.

Arrear amount can be due from few rupees to lakhs of rupees. If the employee has received lesser amount for a particular month due to wrong attendance calculations then for those working dates salary, the amount goes in arrears.

In a good HRMS, the ESS portal will clearly mention that your account is in arrears and will reflect the amount to be paid. This way the employee calculates his finances on everyday basis and is given assurance by the management that the dues will be paid. Arrear payment system helps companies build trust factor among its staff that makes them stay for a longer period in the company.

Let’s understand Arrears in more detail:

Arrears in Accounting

An arrears refers to previous salaries that are paid to the employees. It comes under ‘Other payments’. Total arrears are calculated by adding all the payments that have added over time since the first payment was due.

Arrears in Taxation

Arrears affect statutory payments like PF, ESI, and PT etc. that are applicable on salary. The deductions are made later using supplementary challan if the account is in arrears.

Sometimes arrear payment happens in next year and the employee files tax on previous salary, and the tax on differential amount caused due to salary hike gets piled up. To get tax on this differential amount the government introduced a law that allows deduction as Relief u/s 89 (1).

Let’s explain this with an example:

So, in above example the law gave a relief on tax and did not put tax on additional amount which otherwise would have been charged if the arrears would have been paid in the same year. The arrears sometime go pending for years and years and each employee’s arrears need to be calculated very carefully. If companies have proper HRMS solutions, it helps them get rid of day-to-day calculations.