Life insurance claim receipts, other gratuitous payments and money under a will received on the demise of individual are not taxable, says KPMGs director Vikas Vasal.

Loss of a dear one leaves a void which 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 insurance company, Gratuitous payments from the employer and other sum of money received under a will or by way of inheritance.

A question arises whether such payments, would be taxable in the hands of the family / legal heirs.This article attempts to address the same.

Receipt of life insurance claim from insurance company

Life insurance is an important tool to cover the financial risk associated with the death of the 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 todays 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 (the Act), 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. Barring a 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 lump sum gratuitous payment to the family of the deceased employee. 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 lump sum 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 , the same is not taxable. Hence, the payments received by the family under a will or by way of inheritance are also not taxable.

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.

Vikas Vasal
(The author is the director of KPMG)