Tax Implications of Post-Employment Delayed Salary Payments

Taxing Salary Payments: Understanding the Basics

When an employee resigns from their role, they often assume that all salary-related formalities have been completed before leaving. However, a few months later, they may receive a surprise payment of pending dues, including salary arrears and leave encashment, into their bank account after the final settlement process is completed.

This situation is more common than many employees realize. Delayed salary payments after switching jobs, resignations, or final settlements often create uncertainty around taxability, Form 16 disclosures, and AIS reporting. According to the Income-tax Act, salary income is taxable on the basis of "due or receipt, whichever is earlier." Therefore, the taxability does not depend merely on the actual date of bank credit.

The crucial factor in determining taxability is the year in which the salary became "due" to the employee. Salary is generally taxed in the financial year in which the employee acquires a legal right to receive it after rendering services. Thus, if the salary pertaining to a particular period became due in that year, it will remain taxable in that same year even if the employer delays payment and credits it later.

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For example, suppose an employee worked up to 31 March 2026 and resigned thereafter. The salary for March 2026 is credited by the employer on 7 April 2026. Even though the actual payment is received in FY 2026–27, the salary relates to services rendered during FY 2025–26 and had already become due at the end of March 2026. Accordingly, the amount will be taxable in FY 2025–26 itself, corresponding to Assessment Year 2026–27.

There can, however, be exceptional situations where the salary did not become due in the earlier year. For instance, if there was a dispute between the employer and employee regarding entitlement to salary, or the amount remained uncertain and was settled only later, the right to receive may crystallise in the subsequent year. In such cases, the salary may become taxable in the later financial year when the enforceable right to receive the amount finally arises.

Practical issues often arise because employers may deduct TDS in the year of actual payment instead of the year in which the salary accrued. As a result, the salary may appear in Form 16, Form 26AS, or AIS/TIS for the later financial year, creating a mismatch between the legally correct year of taxability and the year in which TDS credit becomes available.

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To address such hardships, the Income-tax Rules introduced Form 71 (Form 102 under the New Income Tax Act, 2025). Form 71 allows taxpayers to claim TDS credit in the correct assessment year where income has already been offered to tax in an earlier year but TDS has been deducted and reflected in a later year.

Employees should carefully preserve employment-related documents such as the appointment letter, resignation acceptance, salary slips, full-and-final settlement statement, email communications regarding delayed payment, and bank credit records. These documents may become extremely important in establishing the correct year of salary accrual if the Income-tax Department raises any query during assessment. If the employer delays payment after the employee has left the organisation, the same documentary evidence would help demonstrate that the income had already accrued in the previous year.

Finally, employees should not assume that Form 16 alone conclusively determines taxability. Form 16 is an important document, but the legal incidence of taxation depends upon the provisions of the Income-tax Act relating to accrual and receipt of salary.