Background

Due to COVID-19, the world is tremulous, which was not witnessed by the present generation.  More than 4 million people have lasted their breath globally in the last 18 months on account of this disease.  India accounts for about 10% of this death count.

Lakhs of families have lost their loved ones and thousands have lost their breadwinners.  Some families have literally come to the streets.  In some cases, though the individuals affected by the virus survived, they are undergoing severe financial distress. In India alone, almost 31 million people got infected by the virus and many more millions are directly affected due to economic crisis.

In this situation, the soothing fact is that many employers are generously contributing towards their employees’ medical expenses to mitigate the hardship faced by those families.  Where the employees have lost their lives, their families have received financial assistance from the employers.  Furthermore, friends and relatives of the deceased and even the general public have been contributing voluntarily from their pockets.

Income Tax text on paper sheet with magnifying glass on chart, dice, spectacles, pen, laptop and blue and yellow push pin on wooden table

Now, the question is whether such financial assistance received in the form of contributions/gifts from employers, friends, relatives or the general public are taxable in the hands of the recipients.

In this regard, we need to note that the Central Board of Direct Taxes (‘CBDT’) issued a Press Release on 25 June 2021 granting some exemptions.  Let us have a look at the scenario before the issue of the Press Release and that after the issue of the same.

Scenario before the issue of the Press Release

Under section 56(2)(x) of the Indian Income Tax Act, 1961 (‘the Act’), when money or property (whether moveable or immoveable) is received by a person, the same will be considered taxable subject to an exemption of an aggregate amount of Rs 50,000 per year.  If money or the value of the property received is more than Rs 50,000 for the given financial year, the entire amount is taxable.  However, if money or property is received from a relative or a local authority[1], fund or foundation[2], any trust or institution[3] etc., the same is not taxable.

The definition of the term ‘relative’, for this purpose, in the case of an individual, is provided below:

  • Spouse of the individual
  • Brother or sister of the individual
  • Brother or sister of the spouse of the individual
  • Brother or sister of either of the parents of the individual
  • Any lineal ascendant or descendant of the individual
  • Any lineal ascendant or descendant of the spouse of the individual
  • Spouse of the person referred to in items (ii) to (vi) above

Therefore, any money or property received from a person other than a relative or a local authority, fund or foundation, any trust or institution etc. is considered taxable in the recipient’s hands (of course, subject to the exemption up to Rs 50,000).

The definition of the term ‘property’ is also given in the section.  It means,

  • Immovable property being land or building or both
  • Shares and securities
  • Jewellery
  • Archaeological collections
  • Drawings
  • Paintings
  • Sculptures
  • Any work of art
  • Bullion[4]

Therefore, if an article (other than money) that does not get covered under the term ‘property’ is gifted, the same cannot be considered taxable under section 56 of the Act as ‘Income from Other Sources’.

In the context of employment relationship, the entire amount of financial assistance received by an employee from his employer shall be considered an employment benefit and taxable under the head ‘Income from Salary’.  Exemption up to Rs 50,000 is not available here.

The next question is whether the financial assistance received from the employer by an employee’s family upon the employee’s death is taxable.

In this regard, we need to refer to Circular No. 573 dated 21 August 1990 issued by the CBDT in the context of gratuitous payments made to the employees’ families.  The Circular reads as under:

Quote

Taxability of lump-sum payment made gratuitously or by way of compensation or otherwise to widow/other legal heirs of an employee

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.

Unquote

Therefore, any gratuitous payment made by the employer to the widow or other legal heirs of an employee who passed away while still in active service (irrespective of the reason of death) is considered as not taxable.

Therefore, even before the issue of the above-referred Press Release dated 25 June 2021, it was possible for the family members of the deceased employee to avail exemption on the amount received from the employer upon his death.   However, such exemption was not available if such financial help is received upon death, from anyone else (other than the employer).  Similarly, no exemption was available for the financial assistance received by an individual from anyone (whether the employer or other person) for the medical treatment of COVID-19.

Scenario after the issue of the Press Release

The CBDT issued a Press Release on 25 June 2021 wherein it stated as below:

Quote

Many taxpayers have received financial help from their employers and wellwishers for meeting their expenses incurred for treatment of Covid-19.  In order to ensure that no income tax liability arises on this account, it has been decided to provide income-tax exemption to the amount received by a taxpayer for medical treatment from employer or from any person for treatment of Covid-19 during FY 2019-20 and subsequent years.

Unfortunately, certain taxpayers have lost their life due to Covid-19. Employers and well-wishers of such taxpayers had extended financial assistance to their family members so that they could cope with the difficulties arisen due to the sudden loss of the earning member of their family. In order to provide relief to the family members of such taxpayer, it has been decided to provide income-tax exemption to ex-gratia payment received by family members of a person from the employer of such person or from other person on the death of the person on account of Covid-19 during FY 2019-20 and subsequent years. The exemption shall be allowed without any limit for the amount received from the employer and the exemption shall be limited to Rs. 10 lakh in aggregate for the amount received from any other persons.  

Unquote

[The Press Release also stated that the necessary legislative amendments for the above decisions shall be proposed in due course of time.]

In summary, the above Press Release exempts the following:

Sl. No Amount Received Ceiling
(i) The amount received by the taxpayer from the employer for medical treatment of COVID-19 No ceiling
(ii) The amount received by the taxpayer from any person for medical treatment of COVID-19 No ceiling
(iii) Ex-gratia payment received by the family members from the employer upon the death of the employee due to COVID-19 No ceiling
(iv) Ex-gratia payment received by the family members from any other person upon the death of a family member due to COVID -19 Rs 10 Lakh in aggregate

Way Forward

The Press Release has been issued by the CBDT in June 2021 granting exemption for  financial assistance received even during the Financial Year(‘FY’) 2019-20.  Therefore, it can cover a situation where financial assistance has been made by the employer during the FY 2019-20 subject to Tax Deduction at Source (‘TDS’) and the beneficiary (i.e. the employee or the family member, as the case may be) has already filed the income tax return for that FY considering the financial assistance as taxable.

Such a return cannot be revised now, as the due date for filing the revised return was 31 May 2021.  Therefore, the beneficiary can consider the following options:

  • Approach the jurisdictional Assessing Officer seeking rectification of the intimation under section 154 of the Act after the intimation is received[5] or
  • Approach the jurisdictional Commissioner of Income Tax seeking Revision under section 264 of the Act after the intimation is received[6]
  • Approach the jurisdictional income tax authorities seeking condonation of delay for filing the revised return[7]

If the employer has made the payment during the FY 2020-21 or 2021-22 and the amount is subjected to TDS, the following options can be explored:

  • Where the income tax return of the beneficiary is not yet filed
  • If the employer also has not yet filed the eTDS Return(s) for the relevant FY, he should consider the amount of ex-gratia as exempt and should show the TDS amount as refund due to the beneficiary
  • If the employer has already filed the eTDS Return(s), he may revise the eTDS Return(s) and issue the revised TDS Certificate to the beneficiary

If either of the above options is not feasible, the beneficiary should file his return claiming the ex-gratia amount as exempt and claiming the amount of TDS as refund

  • Where the beneficiary’s income tax return is already filed (i.e. in the case of FY 2020-21), he can file a revised return for the year in question claiming the amount of ex-gratia as exempt and claiming the amount of TDS as a refund. The due date for filing the revised return for the FY 2020-21 is 31 December 2021 or the completion of the assessment, whichever is earlier.

Conclusion

In these challenging times, many countries have provided various types of benefits to their taxpayers through stimulus or tax cuts etc.  Some developed countries like the USA have given many tax benefits retrospectively.  Though a little late, the Indian Government, through the CBDT has taken a very appropriate measure by issuing the above-referred Press Release.   This has been hailed to be a welcome move and a much-needed relief to the Lakhs of taxpayers who had suffered mentally, physically and financially, due to COVID.

From the Press Release, it is not clear whether the amount received from the employer / any other person for medical treatment of the taxpayer’s family members is also exempt.  It appears that the intention is to cover even such cases.  Further, it appears that the exemption for expenses on medical treatment would be granted only to the extent of the actual expenditure incurred.

It is also not clear from the Press Release whether the cost of vaccine incurred by the employer for the employees and/or family members of the employee is exempt in the hands of the employee.  Ideally, these expenses should also be exempt since the expenditure is towards precautionary medical treatment.

In the legislative amendment, the Government should make these aspects abundantly clear to avoid litigations between the tax payers and the tax authorities.

——————

Article is authored by CA Prakash Hegde | Email id: [email protected]

[1] Local authority as defined in Explanation to section 10(20) of the Act

[2] Fund or foundation referred to in section 10(23C) of the Act

[3] Trust or institution referred to in section 10(23C) or registered under section 12A or section 12AA or section 12AB of the Act

[4] i.e. gold or silver

[5] Please refer to the decision of the Supreme Court in the case of Model Mills Nagapur Limited [1967] 64 ITR 67  wherein it was held that rectification of an order under section 154 was permissible for the tax levied under a statutory provision which is subsequnety held by the Supreme Court to be inorperative and ineffective.

[6] Please refer to the decision of the Delhi High Court in the case of Vijay Gupta [2016] 238 Taxman 505 wherein it was held that intimation under section 143(1) is regarded as an order for purposes of section 264

[7] Please refer section 119(2)(b) and the circular no. 9/2015 dated 08 June 2015

Author Bio

Qualification: CA in Practice
Company: N/A
Location: Bengaluru, Karnataka, India
Member Since: 15 Aug 2020 | Total Posts: 1

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