Whether gratuity and leave salary becoming due on the death of an employee are taxable in the hands of nominee/legal heir? Please explain in detail.M K L Chand
First of all , it should be known that definition of Salary specifically mentions “Gratuity” .Therefore, gratuity is taxable whether being received by employee or his/her legal heir .However ,the leave salary received by the legal heir of an employee is totally exempt. . The detailed answer is as under:
Gratuity
The gratuity received by an employee is taxable as salary. But if it is received by a legal heir of an employee on his death, it is taxable under “income from other sources’ . I T Act provides exemption of certain amount from death-cum -retirement gratuity u/s 10(10) . The basic rule of exemption in case death -cum retirement gratuity is as as under
| Government & local Authority Employee | Employee Under gratuity Act | Any other Employee |
| Gratuity is fully exempt. | Least of the following: 1. Actual Gratuity 2.15 days salary for every completed year or part thereof exceeding six months 3.Rs 3,50,000 |
Least of the following: 1. Actual Gratuity 2.Half months average salary of each completed year of service 3.Rs 3,50,000 |
Therefore, thumb rule is that whatever govt. or local authority employees or his /her legal heir gets is exempt.In all other cases whether employee or his legal heir , maximum tax free is Rs 3.5 Lakhs.
However, the ITAT, Madras held in case of Smt. L.K. Thangammal v. Third Income-tax Officer 1 ITD 762 , held that the gratuity received by legal heir is not taxable in the hand of legal heir. The Tribunal held
all that we have to consider is the question whether the gratuity is includible in the hands of the legal representative under section 159. The very fact that the right arose on death and, therefore, becomes payable thereafter justified the exclusion of the entire gratuity in the assessment. Section 10(10) which provides for exemption of part of whole of gratuity is only complementary to section 17(1) which makes it taxable. Section 10(10) cannot justify the assessment of taxable gratuity in a wrong assessment or wrong hands. There would have been no dispute about the inclusion of the gratuity if the same had arisen on superannuation or retirement and not on death as this case. Hence, there is no basis for the apprehension expressed by the learned departmental representative that our view will defeat the purpose of the Act. In fact, even in death gratuity the provision relating to exemption may well come into play in the case of an assessment on the executor under section 168.
What if Widow or Legal heir is paid lumpsum payment gratuitously ?
This is not gratuity in that sense, but when a company or employer pays gratuitously to widow of an employee who dies while in service is exempt from tax vide CBDT circular No. 573, dated 21-8-1990 reproduced below
1. Clarifications have been sought from the Central Board of Direct Taxes whether a lump sum payment made gratuitously or by way of compensation or otherwise, to the widow or other legal heirs of an employee, who dies while still in active service, is taxable as income under the Income-tax Act, 1961.
2. The issue has been examined by the Board and it is clarified that any such lump sum payment will not be taxable as income under the aforesaid Act.
Leave Salary
The CBDT has made payments of leave salary to legal heir as Exempt . Read below the the circular which is about government servant , however, I feel it can be applied to all kinds of employees :
1. In terms of para 1(iv) of O.M. No. 16(2)-E-IV(A)/73, dated 9-1-1974 issued by the Ministry of Finance, Department of Expenditure, the family of a Government servant, who dies in harness, is entitled to receive the cash equivalent of the leave salary that the deceased Government employee would have got if he had gone on earned leave. The amount is payable on the date immediately following the date of death, subject to a maximum leave salary for 120 days and subject to the reduction envisaged in rule 40(7)(a) of the Central Civil Service (Leave) Rules, 1972. The question whether the amount received by the family in these circumstances is taxable has been considered.
2. The Board have been advised that this receipt in the hands of the family is not in the nature of one from an employer to an employee. The deceased had no right or interest in this receipt. This payment is only by way of financial benefit to the family of the deceased Government servant, which would not have been due or paid had the Government servant been alive. In view thereof the amount will not be liable to income-tax.
Circular : No. 309 [F. No. 200/125/79-IT(A-I)], dated 3-7-1981.
Therefore, even if the legal heir of non govt. employee gets leave salary , he should claim to be exempt if the logic of leave rule applies to his /her case
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