Circular No. 776

35. Taxability of ex gratia payment made by Central Government/State Government/Local Authority/Government Public Sector Undertaking to heirs of employee on his death, etc

What this is

Circular No. 776 was issued by the Central Board of Direct Taxes on 8 June 1999. Its subject is 35. Taxability of ex gratia payment made by Central Government/State Government/Local Authority/Government Public Sector Undertaking to heirs of employee on his death, etc.

What it does

Extends the earlier position taken in Circular No. 573 dated 21-8-1990 - that a lump sum ex gratia payment to the widow or other legal heirs of an employee who dies in active service is not taxable - to a further situation. Where a person, or his heir, receives an ex gratia payment from the Central Government, a State Government, a local authority or a Government public sector undertaking on account of injury to the person or the death of a family member while on duty, that payment is not liable to income-tax.

Why it was issued

The Board noted that situations arise beyond the death-in-service case covered by the 1990 circular, namely injury on duty and death of a family member on duty.

Who it reaches

Employees of Government, local authorities and public sector undertakings injured on duty
Heirs of such employees who died on duty
Disbursing officers making the ex gratia payment

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.

35. Taxability of ex gratia payment made by Central Government/State Government/Local Authority/Government Public Sector Undertaking to heirs of employee on his death, etc.
Circular No. 573, F.No. 200/115/90-ITA-I, dated 21-08-1990 provided that a lump sum ex gratia payment made, to the widow or other legal heirs of an employee, who dies while still in active service, will not be taxable as income under the Income-tax Act, 1961.
It is noted that there can be situations in which a person or his heir receives ex gratia payment from the Central Government/State Government/Local Authority/Public Sector Undertaking, consequent upon injury to the person/death of a family member, while on duty. Such an ex gratia payment will not be liable to income-tax under the Income-tax Act, 1961.
Circular : No. 776, dated 8-6-1999.

What to watch

The payer matters: the circular names the Central Government, State Governments, local authorities and Government public sector undertakings, not private employers.
The occasion matters too - injury to the person or death of a family member while on duty.
It is a lump sum ex gratia that is spoken of, not a recurring payment such as family pension.

Where you meet it

When an ex gratia is shown in Form No. 16 or brought to tax in the assessment of an injured employee or the heirs of a deceased one.

← Circular No. 777 · Circular No. 775 →

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.