If you are a salaried employee, you must have come across the term “salary arrears” in your career. But, what exactly does payment in arrears mean? It’s a bit of accounting jargon that everyone should know but is often misunderstood. Let’s break it down and look at what the term means.
This article will provide details about salary arrears in India.
An arrear is a term used in finance. A value of money that should have been paid in the past and was missed out is called arrears. Arrears are payments made to compensate for not paying salaries on time. Employees are given arrears when they earn a wage increase in a month but do not receive the money in the following month. In this situation, the overdue money is referred to as arrears since it is given at a later period.
Total arrears is the aggregate of all invoices that have accrued since the initial payment was due. If the product or service has been delivered and the bill payment is due after the specified time, the account is considered to be paid in arrears. A worker, for instance, gets paid in arrears since the job must be performed and finished before any compensation can be paid.
There are several advantages to paying staff in arrears. It enables more equitable, equal, and precise payment and better cash flow management. Arrears are simply wage increases carried over from the previous month of payment to the current payment month.
To compute arrear payments for your staff correctly, you must do the following:
There are two commonly used definitions for payment arrears accounting. Arrears can be defined in two ways:
| Payment in Arrears | Payment in Advance |
| An arrear payment is made after a service has already been provided. Payments are paid to salaried staff after the employees have supplied the service to the company. | Advance payment is made before the service is rendered. Rent can be an instance of an advance payment because it is normally made at the beginning of the month. |
| Other instances of arrear payments include post-paid telephone service, post-paid power bills, real estate taxes, etc. | Premium payments of Insurance policies, prepaid telephone service, and leasing payments are other instances of advance payments. |
An arrear is a term that is commonly used in payrolls. This context relates to compensating a person for work accomplished in a prior pay period instead of the current one. Assume, for instance, that your company pays their employees on 1st May for tasks accomplished over the whole month of April. Here, the employees are paid in arrears since they receive their payments after the task has finished.
Many firms like to create a payroll schedule in this manner. When staff is paid in arrears every month, the company has more time to compute gratuities, bonuses, and additional incentives. The other option to compensate employees is to ‘compensate in the present,’ which implies the employees are compensated for the number of hours they are expected to work under the contract. Instead of depending on a logbook of working hours, the company compensates for what the employee is expected to do. Thus, to remove the expectation portion, companies employ the system of paying in arrears.
In the context of accounting, arrear payment has a somewhat different connotation. Arrears are payments made for products and services following their reception. Assume you buy products from a supplier who accepts a 30-day payment term. This implies you get 30 days after obtaining the product to make your payment. The supplier decides to be compensated in arrears according to their agreement or invoice conditions. Arrear payment provides your company more flexibility and improves cash flow. You may make additional sales to earn money to make the payment if you have a longer period to pay.
Nevertheless, this can also relate to delayed payments that were not mutually agreed upon. If your company is late on its invoices, the payment will be considered to be in arrears until it is completed. Paying late isn’t a smart idea in this situation. You may be charged late penalties, and your goodwill in the market may suffer.
The taxpayer’s entire income generated or received throughout the fiscal year is used to compute the tax. If an assessee receives a portion of his “pay in advance” or “pay in arrears” or family pension arrears, the IT Act permits you to seek tax savings under Section 89(1). A taxpayer’s tax obligations are computed based on the income earned throughout the fiscal year. Past dues levied in the present year may be included in this revenue. Tax rates rise over time, and the tax assessee may be required to pay more taxes in such instances. In such cases, assessees are entitled to tax savings under Section 89(1) of the IT Act.
Here is how you can calculate your tax saving under Section 89(1):
If you get an arrear payment, it affects your income tax status. While you are technically in a particular income tax bracket, it may cause you to ascend in the tax slab. The tax slab may be greater since the government changes the tax bracket every year. However, to receive the tax savings under Section 89(1), Form 10E must be filed.
To recap, payment in arrears is not something strange or unusual. It is just that the service providers are paid after their services are received. If anything, it makes the compensation method so much more reasonable. Instead of being paid for your expected level of service, you are compensated for your actual level of service.
It is very common to find payrolls paid in arrears. As such, you should not be too concerned if you get your money a couple of weeks late. It is far more important than you are paid correctly, and that is regardless of the order in which they are issued. This article was focused on providing the basic idea of arrear payments. Overall, this information should help anyone who is interested in learning more about arrear payments, and hopefully, allay some misconceptions regarding this payment method.
Paying salaries in arrears means the employer is compensating the employees after they have provided their services.
Yes. Paying in arrear allows companies to have constant cash flow while also providing them more time to finalise employee invoices with additional bonuses and incentives.
Yes. Taxes on arrear payments need to be paid just like any other income source.
Form 10E is a document you need to submit to your company in order to enjoy tax savings under Section 89(1) of the Income Tax Act.
Yes. Submitting Form 10E is required in order to seek tax deduction under Section 89(1)
