An employer may revise the salary of an employee from retrospective effect or a salary revision may happen but increments are paid out at a later date. In both these cases, since the salary for previous periods is already disbursed, the differential amount (arrears) is paid out in a subsequent period. In such a situation, to avoid confusion, the arrears amount is computed and mentioned separately in the payslips.
Arrears typically refers to past salaries that are paid to the employees.
Let us take an example: My Basic was Rs. 3000. My company raised my salary from Rs. 3000 to Rs. 4000. This increment was done from 1st of April. Currently, I am in May 2006. Therefore, along with the May salary, I have to be paid Rs. 1000 (Rs. 4000 - Rs. 3000) extra (i.e. the additional salary for April). This additional salary (Rs. 1000/-) is called as Arrears of April salary.
If the salary is revised from the current month, there are no arrears. If the salary is revised from a previous month then arrears are paid to the employee. Arrears is calculated separately for each component under earnings and the date from which the salary is increased is called the Effective Date.
There could be instances when salary revision/correction will happen (again) after commencing arrears. In such cases, arrears will have to be calculated on the arrears paid.