What is the definition of Arrears?
Arrears are overdue payments that are supposed to be paid to individuals at the end of a period after failing to make the required payment on time. The total arrears are the sum of all payments that have accumulated since the payment was due.
What are the Different Types of Arrears?
- Salary Arrears-These arrears refer to the payments that are received by employees for past work, the common reasons being delay in salary increase, promotions, payroll processing anomalies, etc.
- Bonus/Commission Arrears: These payments are made when rewards based on performance or commissions are not issued on time and are paid later in paychecks.
- Loan Arrears: These are payments made by individuals who miss their EMI on loans that are overdue and can result in incurring late fees.
- Dividend Arrears: A company must pay the unpaid dividends on cumulative preferred shares later. If they have missed it out earlier.
- Interest in Arrears: Interest payments that accumulate on bonds or loans over time are not paid in advance but paid at the end.
- Annuity in Arrears: This is when payments are made monthly or annually when a period is ending rather than at the beginning of the period.
- Rent or Utility Arrears: These are payments associated with housing or utilities, like electricity or water bills, that are overdue.
- Pension Arrears: These are late payments delivered to individuals who have retired, and the payments that might have been delayed due to pension calculation updating or delays by the administration.
- Call-in Arrears: This sum of money must be paid by shareholders who failed to pay the call money by the set due date.
What is the Importance of Arrears?
1. Handling Payroll
Arrears are responsible for ensuring that employees receive accurate amounts of money after the salary revision process, promotion procedures, or a delay in payroll management.
2. Enhanced Employee Trust
Paying timely arrears and streamlining payments like salary hikes, bonuses, etc., drives employees to invest faith in employers and an increased level of satisfaction, wanting them to stay longer in the organisation and contribute better.
3. Financial Oversight
Businesses benefit from arrears as they enable them to keep track of outstanding debts, driving companies to identify liabilities, manage them and make payments on time.
4. Tax & Legal Obligations
Arrears must comply with certain tax rules, and their accurate calculations become significant when it comes to reporting in IT returns.
5. Handling Loans
Arrears in finance mean the lapse in payments, signalling that there are high chances that companies might face default charges and have to pay heavy fines. This makes arrears critical in tracking and overseeing debts.
Frequently Asked Questions
1. What is the meaning of being “in arrears”?
Being in arrears means that an individual or a company has failed to make the payments that were originally scheduled for an earlier time.
2. What are common examples of arrears?
Examples include overdue salary payments, rent arrears, missed loan instalments, and dividend payments on shares that were delayed.
3. Are salary arrears taxed differently?
Salary arrears are taxable in the year they are received. However, because they relate to previous years, you can claim tax relief under section 89(1) by filing Form 10E.
4. Is it necessary to file Form 10E?
To claim tax relief on arrears/advance income, filing Form 10E online is mandatory, as your relief may be disallowed.
5. Why do salary arrears occur?
Salary arrears often result from salary hikes implemented retroactively, payroll processing delays, or company policies paying for service after it is completed.
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