This post has already been read 56 times!

How to Claim Tax Refund on Salary Not Paid by Employer

Imagine a situation where your employer has deducted TDS (Tax Deducted at Source) from your salary, reported it to the Income Tax Department, but failed to actually pay the full salary to you. Unfortunately, this isn’t just a hypothetical case—it’s a reality many employees face in India, especially in times of company restructuring, delayed payments, or financial distress.

This comprehensive article explores what happens in such scenarios, how to file your ITR (Income Tax Return) correctly, claim tax refunds, and what legal and practical steps can be taken against employers who deduct taxes but fail to pay full salary.

🔍 What Is the Problem?

Let’s break this down with a real-world example:

• Your Form 16 shows an annual salary of ₹12,00,000.
• TDS of ₹1,20,000 is deducted and reported in Form 26AS.
• However, you only received ₹9,00,000 in your bank account due to financial constraints faced by the employer.

In this case, you’re being taxed for ₹12 lakhs, even though you received only ₹9 lakhs. This leads to overpayment of taxes and a legitimate question arises—can you claim a refund? If yes, how?

📄 Understanding the Legal Position

According to Indian tax laws, income is taxable on accrual or receipt basis, whichever is earlier. So if your salary is “due” and recorded by your employer—even if unpaid—it can be considered taxable income.

Section 192 – TDS on Salary

Under Section 192 of the Income Tax Act, employers are obligated to deduct TDS on estimated income. However, they must also pay the salary to complete the transaction.

Section 15 – Salary Taxability

This section clearly states that salary is taxable when it is “due from an employer or former employer to an assessee in the previous year, whether paid or not.” So, if salary is recorded as due, tax liability arises even if unpaid.

🧾 Can You Claim a Refund If Salary Is Not Paid?

Yes, but with conditions. If your employer has deducted TDS and reported the entire gross salary in Form 16, you must show the same income in your ITR. However, there are still a few options to claim a refund or rectify the situation.

Option 1: File ITR Using Form 16, Claim Refund Later

This is the safest approach. Declare full income as per Form 16, and pay the tax accordingly. Later, if the employer fails to pay the remaining salary, you can claim a refund through rectification or revised returns.

Option 2: Declare Only Received Income

While tempting, this is not recommended. If your Form 16 and Form 26AS show higher income and TDS, your ITR will be flagged for scrutiny or defective filing. The system will generate mismatch errors.

📤 How to File ITR in This Situation

Here’s a step-by-step process for correctly filing your return and ensuring maximum refund eligibility:

Step 1: Download Form 16 and Form 26AS

Make sure you have both documents. Form 16 comes from your employer; Form 26AS is available on the income tax portal.

Step 2: Match the Salary and TDS

Ensure that both forms reflect the same TDS and salary figures. This is crucial for system validation.

Step 3: File the ITR with Reported Salary

Use the reported salary (₹12 lakhs in our example) and match the TDS deducted. Even if you didn’t receive full payment, report as per Form 16.

Step 4: Attach Notes in ITR (Optional)

You can mention in the “Schedule Other Information” or in a covering letter (if scrutiny arises) that only a partial salary was received, and the refund is claimed accordingly.

Step 5: Wait for Refund Processing

Once you file the return, the CPC (Central Processing Centre) will validate TDS and issue the refund if applicable.

⚖️ Legal Options If Employer Fails to Pay Salary

If the employer has deducted TDS but hasn’t paid you the complete salary, that’s not just unethical—it may be illegal. Here’s what you can do:

1. Send Legal Notice

Draft a legal notice through a lawyer demanding payment of pending salary and compensation for mental harassment.

2. Approach Labour Commissioner

File a complaint with the Labour Commissioner under the Payment of Wages Act, 1936. They have the authority to summon employers and settle wage disputes.

3. File a Civil Suit

Under the Indian Contract Act, 1872, employees can sue for breach of contract if the employer fails to pay dues.

4. Report to Income Tax Department

File a grievance with the TDS division of the Income Tax Department. You can also submit a complaint via the e-filing portal under “e-Nivaran.”

5. Use Online Legal Forums

Platforms like CAclubIndia, Vakilsearch, LawRato, etc., can help you connect with lawyers and professionals to escalate the issue.

🧑‍💼 Case Study: Real Incident from CAclubIndia

“My Form 16 shows full salary and TDS, but only partial salary is paid. My employer says the balance will be paid in the next year. How can I claim refund on this?”

In this case, the tax experts advised the following:

• File ITR based on Form 16 to avoid mismatch notices.
• Add a clarification note if required.
• Claim the unpaid salary as a receivable and follow up with the employer.
• If unpaid permanently, legal action may be necessary.

📊 Tabular Summary: Refund Process on Unpaid Salary

📝 Common Mistakes to Avoid

• Underreporting income to match bank salary. This causes mismatch.
• Not checking Form 26AS. Many errors originate from this.
• Filing incomplete documentation. Always maintain salary slips, bank statements, and email communication.
• Assuming unpaid salary is tax-free. It’s not unless employer officially reverses or defers it.

📢 Latest CBDT Guidance (As of 2025)

CBDT has emphasized that TDS claims must be backed by valid income and matching Form 26AS entries. If any mismatch occurs, returns may be flagged under Section 143(1)(a) for adjustment.

Thus, if the employer wrongly reports TDS or misrepresents salary, your only remedy lies in civil action or HR negotiation.

📌 Final Thoughts

It’s extremely frustrating to be taxed for income you never received, but unfortunately, Indian tax laws tax on “due or received” basis. You can still protect yourself by:

• Declaring full income as per Form 16.
• Claiming a refund through ITR if excess TDS exists.
• Using legal routes to recover unpaid salary.
• Documenting all interactions with the employer for legal safety.

Let tax filing reflect legal correctness, and use other means to resolve payment disputes. The refund will follow if TDS exceeds your tax liability, but salary recovery is an HR/legal matter, not a tax department issue.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Consult a tax advisor or legal expert for your specific case.