TDS

Is TDS Applicable on Any Compensation, Claim or Death Benefits Given to the Family of a Deceased Person?

In this article, we discuss the taxability of money received by the family of the deceased from various possible sources.

Death is something that is not just inevitable but also unpredictable. Someone might be in the pink of their health, watching their diet, exercising and doing everything to lead a long healthy life. And even then, there is no saying how life might unfold suddenly.

In India, most households have only one earning member, providing for everything, from basic living needs, to education, to medical support. Death of that earning member would disrupt the lives of all dependents, who may not yet be in a position to take over the mantle of the deceased earning member. And even if there is someone capable of filling in those shoes, he or she would need time to settle into that position before the family unit is comfortably independent, financially, once more. Having some form of financial assistance allows the close ones of the deceased to take their time to grieve without having to worry about the future immediately. There are various sources of financial assistance. Let us take a look at some of them.

How to determine fairness of TDS compensation in case of death

So who is to provide the financial assistance? Of course, community and family may step in to provide assistance out of moral duty. But such assistance leaves the ones receiving the aid with a burden of indebtedness on their conscience.  Is there any way the family of the deceased make a rightful claim for assistance?

An intense analysis of the circumstances of the death can reveal the causes that contributed to the death. And if the cause can be directly attributed to any party or parties, then rightfully speaking, these parties can be legally obligated to compensate the family of the deceased for the disruption caused in their financial support system. Let us study some of these.

In case of death by natural causes, insurance is the best way to secure the financial situation of the dependents. And this is the only way to seek a rightful claim for compensation. And while insurance, which is a commodity, is not mandatory, life insurance is a matter of prudence. The government actively encourages citizens to take up life insurance by offering them incentives such as tax deductions on insurance premium paid during a year and offering heavily subsidised insurance policy covers such as the Pradhan Mantri Jeevan Jyoti Bima Yojana: https://financialservices.gov.in/insurance-divisions/Government-Sponsored-Socially-Oriented-Insurance-Schemes/Pradhan-Mantri-Jeevan-Jyoti-Bima-Yojana(PMJJBY), which offers a cover of ₹2,00,000 for an annual premium of just ₹436. Even private employers take initiatives to ensure that their employees are insured as a part of their corporate social responsibility by implementing mandatory deductions from their salaries towards government insurance schemes such as ESI, so that such unfortunate events don’t have any devastating consequences on the families of their employees.

In the event of accidental death, a police case is usually registered and an investigation is launched into the matter to understand how the accident took place. For instance, if there is a fire in a building causing someone’s death, then the police will inquire into the various possibilities of what caused the fire. Was it caused by some kind of fault in the building? If yes, then the building owner will be held responsible and will be legally obligated to compensate the families of the deceased. Was it due to some sort of reckless and harmful behaviour of an individual or a group of individuals? If this is the cause then such individuals are brought to justice and are directed to compensate the families of the victim. In such matters the court will take several factors, such as the remuneration of the deceased at the time of death, age of the deceased at the time of death, age of the dependents at the time of the death, living circumstances and lifestyle of the dependents at the time of the death etc. and arrive at a monetary value for compensation that has to be borne by the guilty party.

In case of accidental death at the workplace, the government has actually set up guidelines on the procedure an employer must follow immediately on receiving a report of such an accident in order to not be prosecuted. If this procedure is not followed, the employer could go to prison and the compensation compounded by multiple fold as a penalty. In some cases, the employer may even offer the position of the deceased in case there is someone qualified to take that position amongst the dependents and is willing to do so in order to maintain financial continuity and stability.

In case of death due to natural calamity, the government takes the onus of offering financial aid and relief to the family of the deceased. This is not so much assignment of blame as much as it is a gesture of goodwill & care and out of a sense of community. The government offers financial relief from the natural disaster relief funds, such as the Prime Minister’s Relief fund, that have been specifically set aside for such situations, And in order to incentivise people to donate to these funds, the government provides tax benefits such as a hundred percent deduction on income tax for the amount of donation made.

In case of situations such as a terrorist attack or civilian casualty due to an act of aggression by an enemy country or an attack on civilian localities during war time or casualty resulting from any kind of break down in law and orde, such as riots, the government has to take responsibility of it is the government’s duty to maintain law and order in its domestic territory. There is a ‘Central Scheme for Assistance to civilian Victims of Terrorist, Communal and Naxal violence’ that outlines the kind of compensation a person is eligible for under such distressing circumstances.

Taxation on money from compensation on death

While the death of a person can be an intensely emotional issue, the law must always operate outside the spectrum of emotions and function with cold objectivity. It is the prerogative of the tax authorities to investigate all and any kinds of income received under any circumstances, including the death of a person, if only to understand whether the money received can possibly fall under the ambit of income tax or TDS.

Insurance money received from maturity of a policy and not on the death of the policy holder is taxable because the policyholder may have claimed tax deductions in the past on the premium paid under section 80C of the Income tax. But can the same principle apply in the case of the death of a person? After all, the death of the person doesn’t change the fact that the premium paid on the insurance was paid out of income that should have been taxed. But as per the income tax act, no tax is to be deducted from any insurance amount in the event of the death of a person. Hence the person paying is not required to deduct TDS and make TDS payment online

But there is an exception. Sometimes, a policyholder may have instructed the insurance company to not pay the insurance amount on his or her death and has to be paid only after certain stipulations have been met. For instance, a person has taken out two insurance policies. One policy to support his family financially after his death and another for the higher education of his or her child. The second policy may have a stipulation that the policy amount will not be paid to the child until they attain majority. So if the policy holder dies while the child is still a minor, then any interest earned on the policy amount after the death of the policy holder, till the minor child turns eighteen will be liable to income tax because the policy will be considered as matured on the day the policy holder dies and the additional interest will be considered as an income of the minor. So the insurance company will be required to deduct TDS and make TDS payment online.

All other types of compensation in the event of an unnatural death of the deceased have been ruled as not considerable to be income and hence not taxable. So no TDS deduction and Online TDS payments are required. But there is the question of what happens when the compensation has been received from a non resident entity? An example of this is in the case of Kalpesh Dalal vs. IT department. Kalpesh Dalal, a resident of India, along with his wife, Trupti Dalal, was on the Pan Am flight 73 that was hijacked from Karachi, en route to New York from Mumbai. During the incident, Mrs.Dalal was shot dead by a terrorist along with 42 other passengers. In 2004, the government of Libya took responsibility and paid $18.6 billion in compensation to the US, as Pan Am was an American company. However, on filing a case in the US courts, Mr.Dalal and family were paid ₹18.6 crores as compensation. Mr.Dalal soon received a summons from the IT department for not mentioning the receipt of the compensation in his ITR. The high court held that in such matters, the geographical jurisdiction of the person paying the compensation is secondary to the nature of the compensation. An income requires a voluntary exchange. In the case of a terrorist attack, there is no voluntary exchange and hence any money received in lieu of such circumstances cannot be considered an income and hence cannot be taxed.

Conclusion

Fairness of compensation is a matter of perspective. And justice can be delivered only on the basis of facts and proof. So when it comes to these matters, it is best to seek proper legal advice in order to ensure success when challenging the fairness of the compensation received in the event of death. If you are looking for any advice with regards to matters such as taxation and compensation, get in touch with vakilsearch today and we will connect you to the best legal resources to attend to your queries and concerns.

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