Certain taxpayers have lost their life due to Covid-19. Employers and well-wishers of such taxpayers extended financial assistance to their family members so that they could cope with the difficulties faced due to the sudden loss of the earning member of their family.
Here is a case – One of the employees of a leading MNC expired due to Covid. The company is considerate and helpful to the family of the deceased employee. They are paying Rs.20 lakhs as compensation to the wife of the deceased.
The question – Is there a tax on this amount?
As per the Press Note issued by the Ministry of Finance on 25th June 2021, (the notification is not yet issued as of 4th July 21) the following tax exemptions are given –
Amount received from the employer – To provide relief to the family members of such taxpayer, ex gratia or compensation received by family members from the employer of the deceased is exempt from the taxes, without any upper limit.
This means in the above-cited instance, Rs.20 lakhs received by the family member from the company are exempt from tax.
Amount received from others like well-wishers, friends, or relatives– An aggregate of Rs.10 lakhs received from any other persons will be exempt from tax. Look at it this way, suppose, someone dies of a heart attack. His friends mobilize and transfer Rs.9 lakhs to his wife’s account. Is this taxable? The above exemption from tax is applicable in case of death due to Covid and not otherwise. Therefore, the amount received from non-relatives is taxable as a Gift in the hands of the wife.
In case the amount is received from specified relatives as per the Income Tax Act, then it is considered a tax-exempt gift, irrespective of the cause of death.
The exemption is available for all payments received from April 2019 (i.e., FY 2019-20 and subsequent years)
What if the amount is payable to a fiancé?
I got another call today, in this case, the company is giving Rs. 30 Lakhs to the fiancé of the deceased. Is this amount taxable? (Note: Why will the company pay to fiancé? I asked the same question and got to know that their wedding was to be in July 21. The company apparently agreed to pay him or to any one of her (employee’s) family members. Her family members are living abroad)
The exemption is given for amounts received by family members and a fiancé is not a family member yet! Hence, as he is a stranger to the transaction, the amount received is considered as Gift u/s 56(x)(2) and subject to tax at 30%
What if the parents of the deceased are living in the USA or Australia?
The amount can be paid by the company without deducting any taxes, as Covid compensation is not subject to tax, irrespective of the residential status of the parents. However, the catch – such amount may be taxable in the hands of the parents as per the tax laws of their country of residence.