183. Cash equivalent of leave salary payable to legal heirs on the death of Government/non-Govemment employees - Whether taxable under the head "Salaries"
Circular No. 309 was issued by the Central Board of Direct Taxes on 3 July 1981. Its subject is 183. Cash equivalent of leave salary payable to legal heirs on the death of Government/non-Govemment employees - Whether taxable under the head "Salaries".
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Holds that the cash equivalent of leave salary paid to the family of a Government servant who dies in harness is not liable to income-tax. Under the Ministry of Finance Office Memorandum of 9-1-1974 the family is entitled, on the day following the death, to the cash equivalent of the leave salary the deceased would have got on earned leave, capped at 120 days and subject to the reduction in rule 40(7)(a) of the Central Civil Service (Leave) Rules, 1972. The Board's reasoning is that the receipt in the family's hands is not one from employer to employee, the deceased had no right or interest in it, and it is a financial benefit to the family that would not have been due or paid had he lived. The accompanying older letter puts the same point on privilege leave standing to a deceased employee's credit: to be salary the payment must be due from an employer to the assessee, it was not due to the deceased either before or after death, and to the legal representative it is an ex gratia payment on compassionate grounds in the nature of a gift.
The Board considered the question whether the amount received by the family in these circumstances is taxable.
183. Cash equivalent of leave salary payable to legal heirs on the death of Government/non-Govemment employees - Whether taxable under the head "Salaries"
CLARIFICATION 1
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.
CLARIFICATION 2
The leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary.
For being taxable as salary, the payment must be due from an employer to the assessee. If the deceased officer is regarded as the assessee in respect of the proposed payment, then the amount was not due to the assessee. Firstly, this is not a payment which was due to be paid to him after his death as a matter of contractual right. Secondly, even before his death, the payment was not due to him unless and until the leave was actually taken by him.
If the legal representative of the deceased is to be taken to be the assessee, then the amount/proposed to be paid is certainly not due to him. It is an ex gratia payment on compassionate grounds in the nature of gift. Thus, the payment is not in the nature of salary.
Letter : No. 35/1/65-IT(B), dated 5-11-1965.
When leave encashment paid on an employee's death is shown in Form No. 16 or brought to tax in the heirs' assessment.
Rules it names. Rule 40 of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.