Jigar M. Patel
International Tax Attorney
Leave Salary to Legal Heirs exempt
Leave encashment received by an employee while in employment is fully taxable. In case of leave encashment received on retirement, by superannuation or otherwise, exemption is available, subject to specified limits laid down under Section 10(10AA) of the Income-tax Act. An interesting question would arise in regard to taxability of leave salary received by the legal heirs of a deceased employee.
Under Letter No.35/1/65-IT(B) dated 5-11-1965, the Central Board of Direct Taxes (CBDT) has clarified that the leave salary paid to legal heirs of a 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. Similarly, under Circular No.309 dated 3-7-1981, the CBDT has also clarified that receipt of cash equivalent of leave salary, which the deceased Government employee would have got if he had gone on earned leave, by the family of the deceased employee, is not liable to income-tax.
Taxation of Family Pension
Section 16 allows Standard Deduction of up to Rs.50,000 to every employee out of his salary income. ‘Family Pension’ received by a widow after the death of her husband, from his former employer is, however, assessable as income from other sources.
Section 57(iia) provides for a Standard Deduction of one third of the amount of family pension, subject to a maximum of Rs.15,000. In case family pension is being received by the children of the deceased employee, they would also be entitled to separate deduction from their pension income.
It needs to be noted that on the same lines as standard deduction out of salary income, the benefit of standard deduction from family pension can also be enjoyed by a taxpayer who opts for concessional tax rates under the new scheme. No TDS is applicable on payment of family pension by an employer to the family members of the deceased.
Social Security & Public Pensions from the U.S.
Several former residents of the United States (U.S.), who have settled in India, derive Social Security Benefits and Public Pensions in the U.S. In general terms, an individual who is Resident & Ordinarily Resident (R&OR) for tax purposes in India is required to pay tax in India on his or her global income. However, as per Article 20(2) of the Double Tax Avoidance Agreement (DTAA) between India and the U.S., such Social Security Benefits and Public Pensions paid by the U.S., even to an Indian Resident who is R&OR under Indian Tax Laws, are taxable only in the U.S. and not required to be offered for income-tax in India.
U.K. Government Pension also not taxable
Similarly, as per Article 19(2) of the DTAA between India and United Kingdom (U.K.), any pension paid to an individual who had earlier rendered services to the British Government and who has since settled as a Resident in India, is taxable only in the U.K. Hence, in the case of a person who is even R&OR for tax purposes in India, U.K. Government Pension would not be taxable in India.
