My son died in an accident and the organisation paid us (being the parents) a compensation amount after a long-standing court battle. I am a retired taxpayer drawing around ₹7 lakh per year and my wife does not have any income. My doubt is, for example, if the compensation amount paid is ₹100 including interest of ₹60, what should be the amount that I should add to my income for tax purposes? Is it the decreed amount with interest or only the interest portion? As my wife also was given an amount, is she — a non-taxpayer — liable to pay tax too? Is there any limit? Kindly clarify.
Katuru Durga Prasad Rao
Under Section 56(1)(x) of the Income Tax Act, 1961, any sum received by the family member of a deceased person from the employer of such deceased person shall not be considered as income from other sources. Accordingly, if the compensation was received from the employer, then the compensation amount received is exempt from income tax.
On the other hand, if compensation was received for example, under the Motor Vehicles Act pursuant to an accident, then there are conflicting court views with respect to taxability. There are no express provisions in the Income Tax Act to tax such compensation, as they are viewed as capital receipts by the courts.
Further, courts have held that interest on compensation referred above which is not in the nature of income is not taxable in the hands of the family members of the deceased.
If your wife’s total income is less than ₹7 lakh during the relevant financial year, then she is eligible for rebate under Section 87A and no tax would be payable by her under the new tax regime.
The writer is Partner, Deloitte India
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