Circular No. 756

958. Clarification regarding deduction of tax from payments of additional pay, allowances and arrears to Central Government employees following the notification based on recommendations of the 5th Pay Commission

What this is

Circular No. 756 was issued by the Central Board of Direct Taxes on 10 October 1997. Its subject is 958. Clarification regarding deduction of tax from payments of additional pay, allowances and arrears to Central Government employees following the notification based on recommendations of the 5th Pay Commission.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Tells drawing and disbursing officers to deduct proper and adequate tax under section 192 not only from the additional pay and allowances flowing from the revised pay scales notified on the Fifth Pay Commission's recommendations but also from the substantial arrears payable to Central Government employees. It restates that under section 192 the deduction is made at the time of payment, at the average rate of income-tax on the estimated income for the financial year in which the payment is made, at the rates in force for that year.

Why it was issued

The revised scales meant many employees whose income was below the taxable limit under the old scales would now come into the tax net, and many others would move into higher brackets.

Who it reaches

Central Government employees receiving revised pay and arrears
Drawing and disbursing officers of Government departments
Employees newly brought into the tax net by the pay revision

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.192	s.392, s.402

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

958. Clarification regarding deduction of tax from payments of additional pay, allowances and arrears to Central Government employees following the notification based on recommendations of the 5th Pay Commission
1. The Central Government has recently notified new scales of pay and allowances for different categories of Government employees based on the recommendations of the 5th Pay Commission. In addition, the employee will be entitled to substantial amounts of arrears. As a result of this increase, many employees whose incomes according to the old pay scales were below the taxable limit would now enter the tax net. Many other employees would move to higher brackets for application of the tax rates.
2. As per section 192 of the Income-tax Act, 1961 the person responsible for paying any income under the head ‘Salaries’ is required, at the time of payment, to deduct income-tax on the amount payable, at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee for that financial year.
3. All DDOs must, therefore, ensure that proper and adequate tax is deducted from the disbursement to employees of not only additional pay and allowances but also of arrears payable to Central Government employees as a result of the implementation of the revised pay scales.
Circular: No 756, dated 10-10-1997.

What to watch

Arrears are the point of the circular - it is easy to deduct on the revised monthly pay and overlook the lump sum of arrears.
Deduction is on the estimated income of the year of payment at the average rate, so a large arrear payment must be brought into that year's estimate.
The circular says nothing about relief under section 89(1), which an employee receiving arrears would ordinarily consider separately.
It is directed at the Fifth Pay Commission revision of 1997 and speaks to that disbursement.

Where you meet it

In a section 201 or 201(1A) proceeding against a Government office for short deduction on pay arrears.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 02 /2023 — Procedure format and standards for filling an application for grant of certificate under sub rule 4 and its proviso of r 27 September 2023
Circular No. 4/2023 — Clarification regarding deduction of TDS under section 192 read with sub-section (1A) of section 115BAC of the Income-ta 5 April 2023
Circular No. 24/2022 — Government of INDIA 7 December 2022
Circular No. 10/2022 — Circular regarding use of functionality under section 206AB and 206CCA of the income tax act 1961 17 May 2022
Circular No. 4/2022 — Government of INDiA 15 March 2022
Circular No. 11/2021 — Circular regarding use of functionality under Section 206AB and 206CCA of the Income-tax Act, 1961 21 June 2021

← Circular No. 757 · Circular No. 755 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.