Loss of a dear one leaves a void that cannot be filled. The family
besides being emotionally disturbed, is also at loss on financial front,
especially if that individual is the sole/main earning member of the family.
Often the family receives one or more of the following sums on the demise of
the family member:
• Life insurance claim receipts from the insurer
• Gratuitous payments from the employer
• Other sum of money received under a will or by way of inheritance
A question arises on whether such payments would be taxable in the hands of
the family/legal heirs. This article attempts to address the same.
*Life insurance claim receipts *
Life insurance is an important tool to cover the financial risk associated
with the death of an earning member of the family. Traditionally, in India,
life insurance has been sold / understood in the context of tax rebates /
tax deductions. Many a times, people buy life insurance policies towards the
end of the financial year to claim tax deductions. In today's world with
uncertain life span, it is important to buy life insurance polices, after
understanding the key features of the policy to meet personal requirements.
On the demise of the individual, the family has to file a claim with the
insurance company for the life insurance sum as per the policy.
Any sum received can be taxed under the Income Tax Act, 1961, if the same is
covered within the meaning of the word 'income'. Technically speaking, the
life insurance claim received by the family cannot be said to be income in
the hands of the recipient. Further, this payment is also not being made to
compensate for the loss of a particular source of income, but is being made
for the loss of source itself.
Even otherwise, the Act contains a specific provision i.e. Section 10 (10D)
which specifies that any sum received under a life insurance policy,
including the sum allocated by way of bonus on such policy, is not to be
included within the meaning of 'income'. Therefore, the life insurance claim
receipts are not taxable in the hands of the family of the deceased.
The above rule i.e. life insurance receipts are not taxable is subject to
certain exceptions, like sum received the employer under a Keyman insurance
etc. Barring few exceptions, any sum received by way of life insurance claim
is not taxable.
*Gratuitous payments received from the employer *
Many a times, on the demise of an employee, the employer gives lumpsum
gratuitously payment
to the family of the deceased. Such payment is not part of the employment
contract, but is made on compassionate grounds.
As per a circular issued by the apex tax administrative authority, the
Central Board of Direct Taxes (CBDT), any lumpsum payment made gratuitously
or by way of compensation or otherwise to widow/ other legal heirs of an
employee is not taxable as income.
Hence, even these payments received by the family are not taxable.
*Payments received under a will or by way of inheritance *
On the demise of the individual, certain payments may be received by the
family under a will or by way of inheritance. As per the provisions of the
Act, any sum of money received in excess of Rs 50,000 is taxable as income
from other sources. However, if such money is received "under a will or by
way of inheritance", then the same is not taxable.
Hence, the payments received by the family under a will or by way of
inheritance are also not taxable.
*To sum up *
Payments received by the family/legal heirs by way of life insurance
receipts, gratuitous payments from employer, sum received under a will or
inheritance are generally not taxable. It is advisable that the recipient
gives adequate disclosure of such receipts in his tax return for future
reference.
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