Wednesday, September 17, 2008

6th Pay Commission: Government clears doubt on tax on pay arrears

The lack of clarity over taxation of arrears that government employees will receive following the implementation of the 6th Pay Commission recommendations has finally cleared. The tax on first installment will be deducted in the current fiscal and that on the second installment will be deducted next year when they receive the actual payment. 

Confusion had arisen about the tax treatment of the pay arrears that central government employees are about to get as part of their latest wage revision. According to finance ministry sources, only the first installment of the arrears would be taxed this fiscal. The taxation, they would be akin to the tax treatment in 1997 when the fifth pay commission recommendation was implemented wherein the tax was deducted at the time of payment. 

If the tax is deducted, employees who do not fall in the slab of 30% rate of 
income tax, would have to bear a surcharge, as their total income, including both installments would have been higher. As per the current income tax slab, income over Rs 2,50,000 attracts a tax rate of 30% and income above Rs 10,00,000 attracts a rate of 30% as also 10% surcharge. 

The government had last month announced an average increase of 21% in the wages of its employees. It had decided to pay 40% arrears of their increased salaries this year and the rest next year to reduce the burden on the exchequer.

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