TAXATION OF ARREARS (PAY COMMISSION OR OTHERWISE
The taxation of salaries (including arrears) requires clear understanding from legal angle. As per section 15 of the IT ACT, the salary due to be received, allowed to the employee, whether received or not is taxable in the year in which it is due. Accordingly, the employee is required to offer the same on accrual basis whether he likes it or not. However, as far as TDS is concerned, the deductor is bound to deduct tax only at the time of making actual payment of arrears. This dichotomy in law, apparently looks like a mistake. However, it is not so. The deductor is expected to make TDS only at the time of actual payment of salary / arrears. The employee is required to calculate taxes on accrued salary and make good the tax short fall by way of either Advance tax or TDS itself. All employees of Central government should take care of this situation. Only hope is that the CBDT gives clarification / guidelines to the Assessing Officers, so that taxation of arrears can be done on actual receipt basis. At present this is not provided in law