Arrears happen when a pay revision or DA rate hike is announced with retrospective effect, you were paid at the old rate for months you should have been paid at the new rate, and the difference is owed as a lump sum. This is routine for government, PSU, bank and defence employees whenever a Pay Commission report or DA notification kicks in after a delay.
How arrears are calculated
Arrears per month = (New Basic + New DA) − (Old Basic + Old DA), then multiplied by the number of months the revision applies retrospectively.
DA (Dearness Allowance) is calculated as a percentage of Basic pay, and that percentage itself changes periodically (twice a year for central government employees, tied to the All India Consumer Price Index). So a revision often has two moving parts at once: Basic pay going up (from a Pay Commission) and the DA rate simultaneously resetting to 0% and building back up, or DA rate rising independently mid-cycle without any Basic change.
Worked example: Basic revised ₹40,000 → ₹46,000, DA 42% → 46%, 6 months retrospective
- Old gross (Basic + DA): ₹40,000 + (42% × ₹40,000) = ₹40,000 + ₹16,800 = ₹56,800
- New gross (Basic + DA): ₹46,000 + (46% × ₹46,000) = ₹46,000 + ₹21,160 = ₹67,160
- Monthly arrears: ₹67,160 − ₹56,800 = ₹10,360
- For 6 months retrospective: ₹10,360 × 6 = ₹62,160
Of that ₹62,160, ₹36,000 comes purely from the Basic revision (₹6,000/month × 6) and ₹26,160 comes from the combined effect of the DA rate change applying to both old and new Basic. This split matters for understanding your payslip, most PSU/government arrears statements show it broken out exactly this way.
When arrears typically happen
- Pay Commission implementation (7th CPC, or state-level Pay Commissions), announced with an effective date months or years before the actual notification and payout
- DA rate revisions, notified twice yearly (January and July) for central government employees based on AICPI data, sometimes with a payment lag of a month or two
- Bank wage settlements, negotiated periodically by IBA and unions, applied retrospectively from the settlement’s effective date, sometimes 2-3 years of arrears in one payout for long-delayed settlements
- Promotion or increment corrections, where an employee’s pay was fixed incorrectly and later corrected with back-pay
Tax treatment: Section 89(1) relief
Arrears received as a lump sum push you into a higher tax bracket for that year, even though the income actually relates to earlier years when your slab may have been lower. Section 89(1) of the Income Tax Act lets you claim relief for this by recalculating tax as if the arrears had been received in the years they relate to, and adjusting the excess.
To claim this relief, you need to file Form 10E on the income tax e-filing portal, before filing your ITR (filing the ITR without first submitting Form 10E is a common mistake that gets the 89(1) claim rejected by the system). Your employer’s Form 16 shows the arrears amount but not the relief calculation, that’s on you (or your CA) to compute and claim.
Frequently asked questions
Does my employer automatically deduct TDS on arrears?
Yes, arrears are treated as salary income for TDS purposes in the year of receipt, at your marginal slab for that year’s total income (including the arrears). This is exactly why Section 89(1) relief exists, to correct for the bracket-creep effect of receiving several years’ worth of increase in one payment.
Is DA arrears calculated on the old Basic or the new Basic?
On whichever Basic applies to that specific month. If Basic was ₹40,000 for months 1-3 and revised to ₹46,000 from month 4 onward within your arrears period, you’d calculate DA arrears separately for each Basic tier, using the applicable DA rate for each month. This calculator assumes a single uniform Old Basic → New Basic and Old DA% → New DA% jump across the entire arrears period; for staggered revisions, calculate each slab separately and sum them.
Why did I get 18 months of DA arrears in one payment?
Central government DA revisions are sometimes announced but the actual cash payout is deferred (this happened notably during COVID-19, when DA hikes were frozen for over a year and later released as a lump sum arrears payment once resumed). This is a policy decision, not a calculation error, check the official notification for the exact retrospective period.
Do arrears count toward PF and gratuity calculations?
Generally yes for PF, since PF contributions are recalculated on the revised Basic for the retrospective period, meaning you (and your employer) may owe additional PF contributions on the arrears amount too. For gratuity, only your last drawn Basic + DA matters at the time of separation, arrears from years ago don’t retroactively change a gratuity payout that’s already been settled.
Sources
- Income Tax Act, 1961: Section 89(1) and Form 10E relief mechanism
- Central Government DA revision notifications (Ministry of Finance, biannual AICPI-linked)
- 7th Central Pay Commission report and implementation notifications