TDS on Arrears of Salary and PF Accumulated Balance (Income Tax Act 2025)

Arrears of salary are taxed as salary and the employer deducts tax on them under section 392(1) of the Income Tax Act 2025 at the average rate on the employee's estimated salary for the year. Provident fund balances follow a separate path: when an EPF accumulated balance becomes taxable, the trustees deduct 10% if the payment is Rs 50,000 or more (section 392(7)). If arrears push you into a higher slab, the employee can claim relief under section 157 using Form 39.

This guide covers both situations, who deducts, how much, and what the employee can do afterwards. Every rule and figure below comes from the Act (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026, with the section or rule number next to it. The tax-year examples use 2026-27. For the general monthly salary TDS method, see TDS on salary under the 2025 Act.

In which year are arrears taxable?

Under section 15(1)(c), arrears of salary paid or allowed in a tax year are chargeable under "Salaries" for that year, if they were not already charged to tax for an earlier tax year. So arrears are taxed when you receive them, not when they were earned, and the same arrears cannot be taxed twice. This lump-sum effect is why the arrears can push you into a higher slab, and why section 157 relief exists. Section 15(2) says "employer" includes a former employer, so arrears paid by a past employer are covered too.

How is TDS deducted when an employer pays arrears of salary?

Arrears are salary that relates to an earlier period but is paid now, for example a pay revision applied from a past date. They are income under the head "Salaries", so section 392(1) applies. The person paying must deduct tax at the time of payment, at the average rate computed on the rates in force for the tax year of payment, on the employee's estimated income under the head Salaries for that year.

In practice, the arrears are added to the estimate for the year in which they are paid. The average rate goes up, and the employer can correct any shortfall from earlier months. Section 392(5)(c) lets the employer increase or reduce the deduction to adjust any excess or deficiency from a previous deduction or failure to deduct during the tax year.

Worked example 1: arrears paid in February 2027

Assumptions: Ravi earns Rs 1,00,000 a month, so his estimated salary for 2026-27 is Rs 12,00,000. For illustration, assume the tax on that estimate works out to Rs 1,20,000. In February 2027 his employer pays Rs 2,00,000 of arrears from a pay revision. Assume the tax on the revised estimate of Rs 14,00,000 is Rs 1,68,000. These tax amounts are assumed round figures to show the mechanics. They are not a slab calculation.

Step	Working	Result
1. Average rate before arrears	1,20,000 / 12,00,000	10%
2. Tax deducted April to January	10 months x 1,00,000 x 10%	Rs 1,00,000
3. Revised estimate with arrears	12,00,000 + 2,00,000	Rs 14,00,000
4. New average rate	1,68,000 / 14,00,000	12%
5. February: salary plus arrears	(1,00,000 + 2,00,000) x 12%	Rs 36,000
6. March salary	1,00,000 x 12%	Rs 12,000
7. Deficiency on the earlier ten months	(10 months x 1,00,000 x 12%) minus 1,00,000 = 1,20,000 minus 1,00,000	Rs 20,000
8. Total for the year	1,00,000 + 36,000 + 12,000 + 20,000	Rs 1,68,000

The Rs 20,000 deficiency is recovered in February or March under section 392(5)(c), so the year's total matches the tax on the revised estimate.

What if the employee gets income from another employer, or has a house property loss?

Section 392(4) lets the employee give particulars that the employer must take into account. These are salary from another employer in the same tax year, relief under section 157, a house property loss for the year, income under other heads (not a loss other than the house property loss), and tax already deducted or collected elsewhere under the same Chapter. Under rule 204(1) the employee gives the employer the particulars other than the section 157 relief in Form 122; the section 157 relief goes in Form 39 (rule 73(4), covered below). Under section 392(4)(b), the deductible tax on salary cannot be reduced except for a house property loss and for tax deducted or collected under other provisions of the Chapter.

For claims such as house rent allowance or Chapter VIII deductions, the employee gives evidence in Form 124 (rule 205). The employer gives the employee a statement of perquisites and profits in lieu of salary in Form 130 if salary for the year is Rs 1,50,000 or less, or Form 123 if it is more (rule 204(2)).

What is the TDS on PF accumulated balance?

An "accumulated balance due to an employee" is the balance in a provident fund account that the employee can claim under the fund's regulations on the day employment ends (Schedule XI, Part A, paragraph 2(g)). For a recognised provident fund this balance is normally excluded from total income if any one of these holds (paragraph 8(1)):

• the employee has served the employer continuously for five years or more (earlier periods with previous employers whose balances were transferred in count, under paragraph 8(2));
• the service ended because of the employee's ill-health, the contraction or closure of the employer's business, or another cause beyond the employee's control;
• on leaving, the employee takes up employment with another employer and the balance is transferred to the new employer's recognised provident fund, to the extent of the transfer; or
• the entire balance is moved to a notified pension scheme under section 124.

If none of these applies, the balance becomes part of the employee's total income. Paragraph 9 then works out the additional tax by recomputing tax for each year concerned as if the fund had not been recognised. Section 392(6)(a) with paragraph 10 requires the trustees, or the person authorised by the fund, to deduct that tax at the time of payment, as if the balance were salary.

The 10% rule for EPF

For the Employees' Provident Funds Scheme, 1952, section 392(7) is simpler. The trustees, or a person authorised under the scheme, deduct 10% at the time of payment if the aggregate payment is Rs 50,000 or more and the balance is included in the employee's income because paragraph 8 of Part A of Schedule XI does not apply.

Worked example 2: Meena leaves after three years

Assumptions: Meena worked for a private company for 3 years, left in July 2026 (tax year 2026-27), and her service did not end for ill-health or closure. She does not transfer the balance to a new employer. Her EPF balance of Rs 3,20,000 is paid to her. Paragraph 8 does not apply.

Step	Working	Result
Aggregate payment at or above Rs 50,000?	3,20,000 is more than 50,000	Yes
TDS at 10%	3,20,000 x 10%	Rs 32,000
Amount paid to Meena	3,20,000 minus 32,000	Rs 2,88,000

If her balance had been Rs 42,000 instead, it is below the Rs 50,000 aggregate, so section 392(7) would not require this 10% deduction. The balance is still part of her income for the year, and the paragraph 9 tax recomputation described above applies to the extent it is taxable.

What about superannuation fund payments?

Where an employer's contribution to an approved superannuation fund, with interest, is paid to the employee during their lifetime under conditions other than those in Schedule II (Table Sl. No. 8), the trustees deduct tax at the average rate applicable to the employee in the previous three years, or for the period of membership if shorter than three years (Schedule XI, Part B, paragraph 7(1); section 392(6)(b)). The trustees pay the tax to the Central Government within the prescribed time.

The three payment types side by side:

Payment	Who deducts	Rate or method	Provision
Salary arrears	Employer	Average rate on estimated salary for the year of payment	Section 392(1)
Taxable provident fund balance (recognised fund)	Trustees or authorised person	Tax recomputed as if the fund were not recognised, deducted as if salary	Section 392(6)(a), Schedule XI Part A para 9-10
EPF payout of Rs 50,000 or more, paragraph 8 not applicable	EPF trustees or authorised person	10%	Section 392(7)
Superannuation fund payment during lifetime	Trustees	Average rate of the previous three years (or membership period if shorter)	Section 392(6)(b), Schedule XI Part B para 7(1)

Can an employee get relief when arrears push them into a higher slab?

Yes. Section 157(1) gives relief when total income is assessed at a higher rate because of arrear or advance salary, salary for more than twelve months in one tax year, profits in lieu of salary under section 18(1), or arrears of family pension. The relief is not automatic. The employee has to apply, and rule 73 prescribes the method.

In rule 73 terms: C is the tax on total income of the relevant (payment) year, and D is the tax on that income reduced by the arrears. A = C minus D. For each earlier year to which arrears relate, F is the tax on that year's income increased by that year's part of the arrears, and G is the tax on that year's income without it. E = F minus G, and B is the total of all E. Relief = A minus B, if A exceeds B.

Worked example 3: arrears spread over two years

Assumptions: Anil, a Government servant, receives Rs 3,00,000 of arrears in 2026-27. Rs 1,50,000 relates to 2024-25 and Rs 1,50,000 to 2025-26. The tax figures below are assumed round numbers for illustration, not a slab computation.

Item	Meaning	Assumed amount
C	Tax on 2026-27 total income, including arrears	Rs 2,10,000
D	Tax on 2026-27 income reduced by the arrears	Rs 1,20,000
A = C minus D	Tax on the arrears this year	Rs 90,000
E for 2024-25	F minus G on Rs 1,50,000	Rs 20,000
E for 2025-26	F minus G on Rs 1,50,000	Rs 25,000
B	20,000 + 25,000	Rs 45,000
Relief	A minus B = 90,000 minus 45,000	Rs 45,000

How does the employee claim section 157 relief?

• Furnish the particulars in Form 39 on or before the due date specified in section 263(1)(c) (rule 73(3)).
• A Government servant, or an employee of a company, co-operative society, local authority, university, institution, association or body, who is entitled to the relief may also give Form 39 to the employer making the payment under section 392(1) (rule 73(4)), so the employer can take the relief into account while deducting.
• No relief is available on income for which a deduction has been claimed under section 19(1) (Table Sl. No. 12), for that or any other tax year (section 157(2)).

When must the tax be deposited and reported?

Item	Rule	Detail
Deposit (non-Government deductor)	Rule 218(2)	By 7 days from the end of the month of deduction; by 30 April where the payment is in March
Deposit (Government office)	Rule 218(1)	Same day without challan; within 7 days from month end with challan
Quarterly statement, salary (section 392 other than 392(7))	Rule 219	Form 138
Quarterly statement, EPF payout under section 392(7), resident or non-resident individual categories	Rule 219	Form 140 (Form 144 for a non-resident other than a company or foreign company, or a resident but not ordinarily resident)
Certificate, salary	Rule 215	Form 130, by 15 June after the tax year
Certificate, section 392(7)	Rule 215	Form 131, within 15 days from the due date for the rule 219 statement
Relief claim	Rule 73(3)	Form 39 by the due date in section 263(1)(c)

Real-life scenarios

Kiran, a school teacher in a Government-aided school, receives three years of pay-commission arrears in one payment. Her salary tax for the year jumps because the lump sum sits on top of her normal pay. She fills Form 39 and hands it to the accounts office before payment. Her entitlement is worked out under rule 73, and the employer can account for it when deducting.

Priya changes jobs after seven years. Her old employer's PF balance is moved to her new employer's recognised fund. Since the balance is transferred, paragraph 8(1)(c) excludes it, and there is no taxable payout on which section 392(7) deduction arises. If she instead withdrew it after seven years, the five-year rule in paragraph 8(1)(a) would exclude it as well.

Common mistakes

• Deducting arrears at the old average rate. The estimate for the payment year must include the arrears, and any earlier shortfall can be recovered under section 392(5)(c).
• Applying 10% on every EPF payout. Section 392(7) applies only where paragraph 8 does not apply and the aggregate payment is Rs 50,000 or more.
• Forgetting Form 39. Section 157 relief needs an application with the particulars in that form. It does not arrive by default.
• Claiming relief on income already deducted under section 19(1), Table Sl. No. 12. Section 157(2) bars it.
• Missing the service history. Under paragraph 8(2), service with earlier employers counts toward the five years where balances were transferred. Check this before deducting.

Where this is in the Act

• Section 15(1)(c) and (2): arrears taxable when paid, former employer included.
• Section 392(1): average-rate deduction on salary, including arrears.
• Section 392(4) and (5): employee particulars, evidence and adjustment of excess or deficiency.
• Section 392(6) and (7): accumulated balance of recognised provident funds, superannuation fund payments, 10% EPF deduction.
• Schedule XI, Part A, paragraphs 8, 9, 10; Part B, paragraph 7.
• Section 157 and rule 73: relief on arrears, advance salary, family pension arrears; Form 39.
• Rules 204, 205, 215, 218, 219: forms, certificates, deposit and statements.

For a CA firm handling payroll or salary-related TDS for many clients, the difficulty is tracking which employers have arrears or PF payouts in a given quarter and which Form 39 or certificate is pending. Finexo's practice management software keeps those deadlines and client tasks in one place. It does not compute tax or file the forms for you. This article is information, not tax advice.