Income Tax on Pay Arrears.

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Along with the bonanza of receiving the pay arrears following the recommendations of the Sixth Pay Commission, there is also a worry among the employees who are going to receive this pay money as pay arrears. The worry is How much Income tax is payable on the pay arrears?.

There have been some news items on television as well as in the newspapers that most of the pay arrears will go towards payment of income tax once the employees receive the arrears.

However, the government recently, has clarified its stand on the taxation of the pay arrears for the current financial year.Income tax on Pay arrears Sixth CommissionGovernment
representative said that they would tax only 40 per cent of salary arrears to be paid to central government employees in the current fiscal on implementation of Sixth Pay Commission recommendations.

Usually, the income earned in a year is taxed in that particular year, hence whatever the employees receive in this financial year woul be taxed this year. A lot of media sources reported that the entire amount of arrears would attract tax this fiscal.As per the notification issued by the government last month, central government employees will get 40 per cent of arrears during the current financial year and the remaining amount in the next financial year.

Government instructions issued on August 30, 2008, regarding fixation of pay and payment arrears consequent to implementation of the Sixth Central Pay Commission recommendations clearly states that in authorising the arrears income tax as due may also be deducted and credited to the government.

The arrears with effect from January 2006 would cost Rs 29,373 crore. Of the arrears, 40 per cent would be paid during the current year to the 50 lakh employees of the central government.The revised pay scales will add Rs 4,500-5,500 crore to the government exchequer this fiscal in the form of personal income tax.Besides, some money would also come through indirect taxes as some of the increased pay would go into buying products and services, official sources said here.
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