Income Tax - Is the leave encashment of a deceased employee taxable?
WHEN an employee dies, his spouse/legal heir gets certain terminal benefits like leave encashment, gratuity, etc,. Are these amounts taxable in the hands of the widow/legal heir?
CBDT was asked this question 25 years ago. In Circular No.573, dated 21-8-1990, Board stated, "Clarifications have been sought from the Central Board of Direct Taxes whether a lump sum payment made gratuitously or by way of compensation or otherwise, to the widow or other legal heirs of an employee, who dies while still in active service, is taxable as income under the Income-tax Act, 1961."
Board examined the issue and clarified that any such lump sum payment will not be taxable as income under the Act.
But this was long ago - much legislation has passed through since then.
As per Section 56 (1) (vii) inserted by Finance Act 2009, where an individual or a Hindu undivided family receives, in any previous year, from any person or persons, any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; will be chargeable to income-tax under the head "Income from other sources ”.
Then, is the gratuity paid to a widow of an employee covered under "Income from other sources”?
Opinion is divided.
In a note to the CBDT Chairman, the ASSOCHAM stated:
Death of an employee creates a lot of financial hardship to the legal heirs and it will be difficult for the legal heirs to calculate and pay taxes on the termination benefits received.
As the earlier CBDT circular has not been withdrawn, there is confusion as to whether these payments to legal heir are taxable income in their hands or not.
So the chamber has requested CBDT to issue instructions that ‘leave encashment', ‘gratuity' or other termination benefits received by the legal heir of deceased employee will not be taxable.