For lakhs of central government employees looking forward to receiving 40% of the accumulated arrears on their increased salary next month, in time for some festive spending on Diwali and Eid, heres a dampener. The government has decided to levy tax on the entire amount of arrears60 % of which will be paid next yearin the current fiscal itself.

For most employees, the decision would virtually wipe out almost the entire amount of 40% arrears to be paid to them this year. Senior bureaucrats will suffer the most as their tax would be topped with a surcharge of 10%, applicable on an income of Rs 10 lakh and above.

A senior finance ministry official said the surcharge to be paid by officers of the rank of joint secretary and above ranges between Rs 24,600 and Rs 52,500. The impact would be less on the lower grades.

The government had last month announced an average increase of 21% in salaries of central government employees . The hikes, effective from January 1, 2006, would burden the exchequer by more than Rs 17,500 crore annually while the arrears alone account for more than Rs 29,000 crore.

To bring down the burden on the budget, the government had announced that the arrears would be paid in two instalments , with 40% in the current year and the rest in the 2009-10 fiscal. But what the government failed to explain was that the entire arrears amount was taxable in the current fiscal.

Sources said the central staff would have got equal financial benefits in both the years had the government decided to reverse the payouts by giving 60% in the first year and the rest in the second year.

A notification issued by the department of expenditure, which is implementing the sixth central pay commission recommendations, said that income tax as due may also be deducted and credited to the government while making sure that it brings down the burden on the Union Budget.