Salary structure in payroll includes different segments relying upon organization standards. Nonetheless, there are some segments common to all salary structures. These components include basic pay, PF and gratuity. House rent, special allowance, medical and travel allowances are also very common components of a company’s salary structure.
Salary revision is the procedure of modification of the whole pay structure including all primary salary components. This is where it differs from the salary hike in which an increment can be related to only one component of the entire salary structure. It’s very common to be unclear when it comes to salary revision and salary increment.
A revision in salary means a revision of salary structure in all components, taking into account the IT considerations, and it is given to make a position market competitive. It’s important to understand the difference between both. In simple words, 12 percent salary revision implies a 12% increase of all components of salary. Whereas, 12% salary increment relates to 12% hike in any one component; usually the basic pay. Salary revision is the modification of all components of salary structure that may also ultimately lead to no percentage increase in the net salary.
Salary revision is a broader term used for a comprehensive review of all components. Salary increment is only one part of basic salary component for an increase in pay in the basic based on either on yearly basis in time scale.
What are Salary Arrears in Indian Payroll?
Arrears are increments in salary carried forward from the previous months to be paid in the current month. In simple words, whenever the payment that was to be made in the current month is paid later, it is considered as paid in arrears. Employees are paid arrears when they get a salary hike in one month but receive the amount in some other month. In this case, the company is due to its employees and the due amount which is paid at a later date is termed as arrears.
When employees are paid in arrears in practical scenarios?
There are various scenarios that can lead to payment in arrears. Here are the most common ones;
- Missed payment: It’s quite possible for an HR manager to miss any payment while calculating the compensation. In this case the missed payment is paid in arrears. The HR department is always filled with gigantic tasks and when workflow is managed manually, the possibility of human errors is higher.
- Glitch in Attendance Process: If due to some reason whatsoever the attendance has not been corrected or the employee has applied but the manager did not approve on time, that amount is paid in arrears in the next month.
- Bonus not processed: It happens when there is an incentive, bonus, or monetary addition to the salary for the month because a festival or because a team or employee did an exceptional performance. if the amount is not processed by the manager on the time, it is adjusted in arrears in the next month.
- Reimbursement claims not raised on time: For the employees who do fieldwork as well,organizations have various provisions for reimbursement of amount spent on travel, food, stay or any other expense related to office work. The bills are to be submitted and if not done on time, the payment is made in arrears.
Calculation of salary arrears in the Indian Payroll process
Example: Rahul has a salary of Rs. 10,000 in the month of March and he gets an increment of Rs. 5000 in the month of April. Due to some backend salary processing issues, the amount is reflected in the month of June. Also, in the month of June arrears for the month of Apr and May will be reflected i.e., Rs. 10,000.
Income tax on arrear salary – relief under section 89(1)
Tax is calculated on the total income earned or received during the year. If an employee’s total income includes any past dues paid in the current year, the employee may be worried about paying a higher tax on such arrears.
If an employee has received any portion of the salary in arrears or in advance, or he has received the family pension in arrears, the employee is allowed some tax relief under section 89(1).
To save you from any additional burden of tax due to delay in receiving income, the tax laws allow a relief under section 89(1).
In simple words, you do not pay more taxes if there was a delay in payment to you and you were in a lower tax bracket for the year you received the money.
The Payment Of Bonus Act, 1965
As per statutory laws, the Government of India mandates organisations to pay yearly bonuses to their employees. The Payment of Bonus Act, 1965 is the principal act for the payment of bonus to the employees which was formed with an objective for rewarding employees for their good work for the organization. It is a step forward to share the prosperity of the establishment reflected by the profits earned by the contributions made by capital, management and labour with the employees.
- It extends to the whole of India.
- Applicable to any establishment with 20 or more employees or any factory with 10 or more employees.
- Save as otherwise provided in this Act, it shall apply to – every factory; and every other establishment in which twenty or more persons are employed on any day during an accounting year.
- Eligible for employees drawing ₹21000 per month or less (basic + DA, excluding other allowances). As per the 2015 amendment, when a salary exceeds ₹7000 or the minimum wages fixed by the government, the bonus is payable on whichever is higher.
- Bonus payable will be at a min rate of 8.33%, and max at 20 %.
The objective of the Payment of Bonus Act is to reward the employee of the organization by sharing the profits earned and is linked to productivity.