Circular No. 573

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

What this is

Circular No. 573 was issued by the Central Board of Direct Taxes on 21 August 1990. Its subject is 34. Taxability of lump sum payment made gratuitously or by way of compensation or otherwise to widow/other legal heirs of an employee.

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.

What it does

Clarifies that a lump sum paid gratuitously, or by way of compensation or otherwise, to the widow or other legal heirs of an employee who dies while in active service is not taxable as income under the Income-tax Act, 1961.

Why it was issued

Clarifications had been sought from the Board on whether such a lump sum was taxable as income.

Who it reaches

Widows and legal heirs receiving a lump sum on an employee's death in service
Employers making such payments and deciding whether to deduct
Assessing Officers taxing such receipts in the recipients' hands

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

34. 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.
Circular : No. 573, dated 21-8-1990.

What to watch

It covers a lump sum paid on death in active service; it says nothing about payments on retirement or on death after leaving service.
The circular is short and states no conditions, so the character of the payment as a gratuitous or compensatory lump sum to the heirs is what must be shown.
It speaks to the taxability of the receipt in the recipients' hands, not to the employer's deduction of the payment.

Where you meet it

When a lump sum received by a widow on her husband's death in service is brought to tax, or when an employer considers deduction on such a payment.

← Circular No. 574 · Circular No. 572 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.