As the pandemic continuing to grip the countries across the globe, its effect can be across sectors, with countries bringing about necessary legislative amendments to provide relief to affected sectors and public at large. The CBDT vide its Press Release dated 25th June 2021 announced tax exemptions in respect of amounts received for COVID-19 treatment and ex gratia amounts received in case of death, from employers and well-wishers.
As we still await legislative amendments effecting these announcements, CA M.R. Ashwini and CA T. Usha Rani in their article acquaint readers with the existing provisions and their tax implications of various amounts received by employees and their nominees / beneficiaries from the employer. They also discuss procedural compliances in terms of existing provisions and are hopeful of further clarifications from the CBDT.
“Tax Implications: Amounts received by legal heir on death of employees”
A. Background
An unprecedented crisis imposed by COVID pandemic has kept the economy reeling. Millions have lost their livelihoods and many more have succumbed to the deadly virus. In this pretext, the article aims to analyse the tax implications on amounts received by legal heir/nominee at the event of death of employees.
B. Taxability of amounts received by the legal heir/nominee/widow at the demise of employee
At the sad demise of an employee, payments such as full and final settlement, PF contribution, Insurance compensation etc. are made to their legal heir/nominee/widow (hereinafter, referred to as ‘recipients’). The taxability of such receipts in the hands of recipients are discussed below:
1. Full and Final Settlement (F&F):
The F&F comprise of various components such as salary, bonus, allowances and leave encashment. These amounts are computed based on the salary payable till the date of demise. It includes any additional payments such as overtime, awards and rewards.
Tax Impact:
F&F other than leave encashment:
Total income till the date of death is computed at the event of full and final settlement. TDS (if any) would be deducted by the employer and the balance income shall be remitted to the account of the employee.
However, in cases where the TDS deducted by the employer falls short of the taxable income then the provisions of section 159 of Income Tax Act are attracted.
As per Section 159 of Income Tax Act, on demise of a person, his legal representative becomes liable to pay the taxes which the deceased was supposed to pay from the beginning of Financial Year till the date of his death. Such liability should, however, be limited to the assets inherited from the deceased.
For the purposes of Income Tax Act, the legal heirs can be considered as the legal representative. The responsibility rests on the legal heir to file the Income Tax return of the deceased. The legal heir shall register himself on the Income Tax portal after attaching documents such as copy of death certificate, copy of PAN card of both the deceased and the legal heir, copy of proof of legal heir.
Leave Encashment (10(10AA)): As per circular No. 309 dated 03.07.1981, CBDT clarified that leave salary paid to legal heirs are in the nature of ex-gratia payment and not taxable in the nature of salary. Ex-gratia payments in lump sum are also tax exempt. (Ex-gratia payments are discussed in detail infra at Point No.7).
2. Gratuity:
Gratuity is payment made by the employer towards the employee in appreciation of the past services rendered by the employee. It can be received by the employee at the time of retirement or by the legal heir on the event of death of employee.
Gratuity is to be processed as per Gratuity act wherein the tenure of service is to be considered until the date of retirement. The service length is determined as difference between the date of retirement and date of joining.
Tax Impact:
As per income Tax Act, the tax exemption amount on the payment of gratuity is dependent upon whether the establishment is covered under the payment of gratuity act or not.
Gratuity received in excess of the exempted amount is taxable in the hands of legal heir under the head Income from other sources.
However, as per circular 573 dated 21.08.1990 any lump sum payment made gratuitously or by way of compensation or otherwise, to the widow/legal heirs of an employee who dies while in active service will not be taxable under Income Tax Act.
3. NPS Payments:
National Pension Scheme is a retirement scheme introduced by the Central Government. Individuals within the age of 18-65 years can open their account. There are two types of account possible under NPS – Tier 1 (Pension Account) and Tier II (Investment Account). Tier 1 account is pension account where contributions are made to build the retirement corpus. Tier 2 account is add-on voluntary savings account.
Under the Scheme, the individual as well as his employer can contribute towards the retirement account. Such contributions made are eligible for deduction under section 80CCD.
Tax Impact:
Upon demise of the employee covered under this scheme, the entire accumulated pension wealth would be paid to the recipient of the subscriber. This income if withdrawn on lump sum basis shall be completely tax free basis circular 573 dated 21.08.1990. However, any periodical payment shall be subject to income tax as per applicable slab rates.
4. Life Insurance:
Policy holder and the life insurance company enter into an agreement via the Life Insurance Policy. The policy holder contributes premium and the company shall provide lump sum coverage in case of death of insured or upon satisfaction of other conditions.
Tax Impact:
Any proceeds paid to nominee/legal heir on death of the insured is tax exempt u/s 10(10D) under the Income Tax Act.
5. Family Pension:
Pension is the payment made by the employer after the retirement/death of the employee as a reward for the past service. When this payment is made periodically, it is referred to as uncommuted pension. When a portion of the payment is foregone to receive lump sum amount, it is referred as commuted pension. Upon the death of employee, the family members receive pension. This is known as Family Pension.
Tax Impact:
Uncommuted (Monthly) Pension:
Taxable in the hands of legal heir under the head income from other sources subject to deduction under section 57. The section allows standard deduction of 1/3rd of amount received or Rs.15,000 whichever is less.
Example:
Mrs. A (Widow) receives pension income of Rs.60,000.
Deduction u/s 57: Lower of the following:
i) 1/3rd of amount received = 20000
2) 15,000
Hence Taxable Pension Income = Rs.60,000 – Rs.15,000 = Rs.45,000
Commuted (Lumpsum) Pension:
Reliance can be placed as per circular 573 dated 21.08.1990 any lump sum payment made gratuitously or by way of compensation or otherwise, to the widow/legal heirs of an employee who dies while in active service will not be taxable under Income Tax Act.
6. Payments made under will or inheritance
Any sum of money or any property received under will or by way of inheritance is not taxable in the hands of nominee/legal heir as per proviso to section 56(2)(x) of Income Tax Act.
7. Ex- Gratia payments made by employer:
Ex-gratia payments are payments made by employer without there being an obligation on the employer to disburse such amount.
Tax Impact
As per Circular 573 dated 21.08.1990, issued by CBDT, any lump sum payment made at the event of demise of employee while in active service, shall be tax exempt in the hands of recipient. However, recurring payments may be taxable.
Further, Press release dated 25.06.2021 indicated that any ex-gratia payment received by the family members at the demise of employee on account of Covid-19 during FY 2019-20 and subsequent years., should be exempt from tax. The Press release also states that any payment received from any person other than employer should be exempt up to Rs. 10 lakh in aggregate. Official legislative amendments in this regard are awaited.
8. PF payments:
These payments comprises of Employee Provident Fund, Employee deposit linked insurance and Employee pension scheme.
Employee Provident Fund:
It is a welfare scheme designed to provide secured benefit for employees post their retirement or after exit from employment. Upon death of the employee, the legal heirs/nominees shall be entitled to receive the benefits. Both employer and employee make contributions towards the Fund.
Employee Deposit Linked Insurance Scheme:
This Scheme offers life insurance coverage to the employees who are covered under EPF.
Employee Pension Scheme
The scheme makes provisions for employees working in the organized sector for a pension after their retirement at the age of 58 years. In case of the death of member, the widow and children get a monthly pension.
The accumulations of employee’s contribution and employer contribution during the service of employee is maintained with EPFO. The accumulations will not be available with Employer and can be retrieved only from the UAN Portal Passbook. This can be withdrawn by legal heir(s) / nominee(s) through online mode provided the nomination details were updated with the employer. If not, a consolidated form is to be submitted to Employer for attestation and later submitted at PF office for withdrawal process.
Tax Impact
• Lump sum payments made at the death of employee out of employee provident fund is exempt under section 10 (11)/ 10(12) of the Income Tax Act.
Any recurring payments made out of employee pension scheme is taxable.
C. Summary of tax impact:-
| Sl No | Nature of Payment | Taxable / Non-Taxable | Taxability |
| 1 | Full and Final Settlement | Taxable | Employer shall deduct TDS and remit the balance income. In case, TDS falls short of taxable income of deceased employee then
Legal Heirs shall be responsible to pay balance tax (if any) due of the deceased employee. Leave encashment is not taxable in the hands of legal heir/nominee |
| 2 | Gratuity | Non Taxable if lump sum payment is made. |
Gratuity received in excess of the exempted amount is taxable in the hands of legal heir under the head Income from other sources.
However, as per circular 573 dated 21.08.1990 any lump sum payment made gratuitously or by way of compensation or otherwise, to the widow/legal heirs of an employee who dies while in active service will not be taxable under Income Tax Act.
|
| 3 | NPS Payments | Non Taxable if lump sum payment is made |
Upon death of the subscriber, the entire accumulated pension wealth would be paid to the nominee/legal heir of the subscriber. This income if withdrawn on lump sum basis shall be completely tax free. |
| 4 | Insurance compensation | Non taxable |
Life Insurance LIC proceeds at the event of death are tax exempt u/s 10(10D) |
| 5 | Family Pension | Non Taxable if lump sum payment is made |
Taxable in the hands of legal heir under the head income from other sources subject to deduction under section 57. Reliance can be placed as per circular 573 dated 21.08.1990 any lump sum payment made gratuitously or by way of compensation or otherwise, to the widow/legal heirs of an employee who dies while in active service will not be taxable under Income Tax Act. |
| 6 | Will or Inheritance payment | Non Taxable | Amount received under will or inheritance is tax exempt in the hands of recipient u/s 56. |
| 7 | Ex-gratia payment | Non Taxable if lump sum payment is made | Payment is done by employer gratuitously. Lump sum payments are not taxable per the circulars and press release. |
| 8 | Provident Fund withdrawal | Non Taxable if lump sum payment is made | Proceeds received on death of employee is considered benefit extension and hence not taxable in hands of recipient. However, recurring payments made out of pension scheme is taxable. |
D. Procedural formalities to be taken care by employer
• Updated nominee details
It has to be ensured by the employer that the nominee details have been duly updated by the employee in order to avoid any future hassles.
In cases where the nominee details are not updated, a confirmation has to be taken from the widow/legal heir regarding the nominee to whom the money shall be devolved.
• Indicative list of documents required
1. Death certificate of deceased employee
2. Indemnity Bond to be executed between members of family / legal heir / nominee,
3. Legal Heir Certificate
4. Bank Account Details of Legal Heir / Nominee
5. Registered Will.
5. Further Clarifications awaited
At the wake of COVID, several employers have been at forefront to remit money gratuitously to support nominee/legal heirs of deceased employees. Some of the employers also chose to remit the money to unions or other intermediary for ease of administration. The intermediaries would then remit the money to recipients.
The Circular and recent press release discuss about tax exemption in cases where amount is given by the employer. Going by the literal interpretation, such payments made to recipients by intermediaries may not be tax-exempt as they do not come directly from the employer. Clarification in this regard from CBDT is much awaited.
First Published in: Taxsutra
Authors
Manager – Tax & Regulatory
Associate – Tax & Regulatory
