Section 192(b) of the Income Tax Act: Taxability of Arrears of Salary

The Income Tax Act's Section 192(b) addresses whether an employee's wage arrears are subject to taxation. This section, which establishes the guidelines for determining the tax obligation of salary arrears, is crucial for both employers and employees. The amount of salary to which an employee is entitled but has not received is referred to as arrears of salary. There could be a number of reasons for this, including retroactive wage hikes or delayed payments. Employees may get salary arrears in one big payment or over time in installments. We will go into great detail about Section 192(b) of the Income Tax Act in this blog post, covering its ramifications, applicability, and meaning.

---

Table of content

Understanding the Tax Implications of Arrears of Salary

What is Section 192(b) of the Income Tax Act?

Tax Liability for Arrears of Salary

Calculation of Tax for Arrears of Salary Under Section 192(b)

Conclusion

Most Asked Questions

---

Understanding the Tax Implications of Arrears of Salary

Salary arrears have the potential to greatly raise an employee's taxable income for the year they are received. This is due to the fact that the tax obligation on salary arrears is computed differently than the tax obligation on the employee's normal wage and can be liable to higher tax rates. Employees should organise their money appropriately and know the tax liability on salary arrears. To lower their tax liability, employees should also think about making investments in tax-saving products like tax-saving fixed deposits or mutual funds.

At the same time, it is the duty of employers to withhold tax at source (TDS) from employee salary arrears. This means that before paying the employee, the employer must determine the tax liability on the salary arrears and subtract the necessary amount of tax. Penalties and interest charges may be imposed on the employer if TDS is not deducted or is deducted in error. Employers must therefore make sure they are in compliance with the Income Tax Act and are aware of the rules of Section 192(b).

What is Section 192(b) of the Income Tax Act?

The Income Tax Act's Section 192(b) addresses whether an employee's salary arrears are taxable. The amount of salary to which an employee is entitled but has not received is referred to as arrears of salary. There could be a number of reasons for this, including retroactive wage hikes or delayed payments. The guidelines for determining the tax obligation on several types of salary arrears are outlined in this section. For all employees who receive salary arrears during the fiscal year, Section 192(b) is applicable. Remember that the year in which salary arrears are received, not the year in which they were earned, determines the tax obligation on such arrears. This implies that the arrears will be taxed in the year they are received, regardless of when they were incurred.

Tax Liability for Arrears of Salary

The Income Tax Act's Section 192(b) states that the tax obligation on salary arrears is computed differently from the tax obligation on the employee's normal wage. This implies that different tax rates and tax bands may be applied to the tax on salary arrears than to the tax on normal salary. The year that salary arrears are received, not the year they were earned, determines the tax obligation on such arrears. This implies that the arrears will be taxed in the year they are received, regardless of when they were incurred. For instance, the tax liability on salary arrears for the FY 2023–24 will be determined using the tax rates and tax brackets in effect for the FY 2024–25 if the employee gets the salary arrears in the FY 2024–25.

Calculation of Tax for Arrears of Salary Under Section 192(b)

The following steps are used to determine the tax due on salary arrears: 

• Determine the tax owed on the employee's whole income for the fiscal year, including any unpaid salary arrears. 

• Determine the tax obligation based on the employee's entire income for the fiscal year, less any salary arrears. 

• Deduct the tax obligation determined in Step 2 from the tax obligation determined in Step 1. 

• Using the tax rates in effect for the financial year in which the salary arrears are received, determine the tax obligation on the arrears. 

• To get the overall tax due on the salary arrears, add the tax liabilities determined in Steps 3 and 4.

Conclusion 

Section 192(b) of the Income Tax Act is a crucial clause that controls how much tax is applied to employee salary arrears. To maintain compliance with the Income Tax Act, it is critical that both employers and employees are aware of the rules of this section. Arrears of salary are subject to the appropriate amount of TDS deduction by employers, and employees are required to budget for the additional tax associated with such income.

FAQ

Q1. What are the arrears of salary?

The amount of salary to which an employee is entitled but has not received is referred to as arrears of salary. There could be a number of reasons for this, including retroactive wage hikes or delayed payments.

Q2. In which year does the tax liability on arrears of salary apply?

The year that salary arrears are received, not the year they were earned, determines the tax obligation on such arrears.

Q3. What is the process for the calculation of tax liability on arrears of salary?

The tax obligation on salary arrears is computed differently from the tax obligation on the employee's base pay. It's possible that the tax rates and tax brackets used to determine the tax on pay arrears differ from those used to determine the tax on normal wage.

Q4. Do employers have to deduct TDS on arrears of salary?

Indeed, it is the duty of businesses to withhold tax at source (TDS) from employee salary arrears.

Q5. What happens if an employer does not deduct TDS or deducts an incorrect amount?

Penalties and interest charges may be imposed on the employer if TDS is not withheld or is withheld in error.

Q6. How can employees lower their tax liability on arrears of salary?

To lower their tax liability, employees could think about making investments in tax-saving products like tax-saving fixed deposits or mutual funds.

Q7. How do arrears of salary impact an employee’s tax liability?

Salary arrears have the potential to greatly raise an employee's taxable income for the year they are received.

Q8. What is the tax limit under Section 192(b)?

If an employee's taxable income does not exceed Rs. 2.5 lakhs (Rs. 3 lakhs for senior citizens and Rs. 5 lakhs for super senior citizens), no tax is required to be withheld. If, following deductions or any applicable refund, the employee's income tax liability is "NIL," no tax needs to be withheld.

Q9. How can employees do financial planning to deal with the increased tax liability on arrears of salary?

Employees who estimate their tax burden on salary arrears and make appropriate investments in tax-saving instruments can better manage their finances.

Q10. Is the tax liability on arrears of salary subject to TDS or self-assessment tax?

If the employer pays the salary arrears, the tax obligation on the arrears is liable to TDS. In the event that a former employer or any other party pays the arrears, the tax obligation must be settled through self-assessment tax.

Q11. Are there any exemptions or deductions for arrears of salary?

No, there aren't any particular exclusions or deductions that apply to salary arrears. The applicable tax rates and tax brackets are used to determine the tax obligation on salary arrears.

Q12. What is Section 192(b) of the Income Tax Act primarily concerned with?

Section 192(b) deals with the provisions for tax deduction at source (TDS) on salary payments. It outlines the methodology for calculating and deducting tax from employees’ salaries based on their income and applicable tax slabs.

Q13. How does Section 192(b) affect monthly salary calculations for employees?

Under Section 192(b), employers are required to calculate TDS on an employee’s salary every month based on the estimated annual income and applicable tax slabs. This ensures that the correct amount of tax is deducted and paid to the government throughout the year.

Q14. What documentation must employees provide under Section 192(b) to ensure accurate TDS deductions?

Employees must provide proof of their income, deductions, and exemptions, such as investment declarations, proof of insurance premiums, and other eligible expenses. This helps the employer calculate the accurate TDS amount under Section 192(b).

Q15. Are there any specific exemptions or deductions applicable under Section 192(b)?

Yes, Section 192(b) allows for exemptions and deductions such as those under Section 80C (e.g., investments in PPF, LIC), Section 24(b) (home loan interest), and other applicable sections. Employees should submit proof of these to their employer to adjust TDS calculations.

Q16. What happens if an employee’s income exceeds the estimated amount under Section 192(b)?

If an employee’s actual income exceeds the estimated amount, the additional tax liability must be settled through a revised TDS calculation. This ensures that any additional tax due is covered, avoiding underpayment and potential penalties.

Q17. How should employees report discrepancies in TDS deductions made under Section 192(b)?

Employees should report any discrepancies in TDS deductions to their employer as soon as they notice them. If discrepancies are not resolved, they can raise the issue with the Income Tax Department or seek guidance from a tax consultant.

Q18. Does Section 192(b) apply to both salaried employees and freelance workers?

Section 192(b) specifically applies to salaried employees where TDS is deducted from monthly salary payments. Freelance workers or consultants are generally subject to different provisions under Section 194J for professional fees.

Q19. Can employers adjust TDS under Section 192(b) for advance tax payments made by employees?

Yes, employers can adjust TDS under Section 192(b) if employees have made advance tax payments or have already paid taxes for the year. This adjustment helps in aligning the TDS with the actual tax liability of the employee.

Q20. What are the consequences for employers who fail to comply with Section 192(b) regulations?

Employers who fail to comply with Section 192(b) regulations may face penalties and interest charges for incorrect or non-deduction of TDS. It is crucial for employers to ensure accurate and timely deductions to avoid such penalties.

Q21. How can employees verify if the TDS deducted under Section 192(b) is correctly reflected in their Form 16?

Employees should compare the TDS details in their Form 16 with their monthly salary slips and tax calculations. Discrepancies can be reported to the employer for correction, ensuring that the Form 16 accurately reflects the TDS deducted and paid.