Taxability of Compensation received

 

Taxability of Compensation received

 

In course of our life we receive some compensations from various sources and confused if it is Taxable in our hand or not . To remove such confusion , this article will highlight some important compensations and its Tax treatment.

 

It may be noted that as per Income Tax Act, 1961, the definition of income do not specifically define “compensation” received as income

so question arise how compensation received under various sources is treated under Tax ?

 

Here are some different sources of Compensation received and its Tax treatment

 

 

1. Taxability of Compensation & Interest Paid in Air Crash

 

Amount received by Nominee is fully Tax free in the hand of nominee , Amount received by survivor is also tax free in the hand of survivor as it is compensation due to disability .

 

2. Taxability of Compensation & Interest awarded by Motor Accidents Claims

          Compensation received from Motor accident claim tribunal is Tax free to the extent of Principal amount , if due to delay in payment some interest is also received , then it is taxable in the year of receipt.

 

3. Compensation received from builder for its failure to deliver flats in time and booking is cancelled

Compensation received by assessee on cancellation of BBA (builder buyer Agreement) is  treated as capital receipt and taxable as a capital gain.

 

4. Compensation received from Builder for delayed possession of Flat (booking not cancelled )

 

It can be treated in two ways :

1.  We may be included it in Value of property and treated it as investment , this will reduce cost of investment and increase capital gain at the time of sale.

2.    It can be treated as revenue receipt and pay tax on it as other income

 

5.Compensation received from Life Insurance company

 

Compensation received from Life Insurance company by nominee in case of death  is fully Tax free .

 

In case of endownment policy where some money is received from time to time  by survivor Taxability depends on premium amount if it is more than 10% of policy .

 

6.Compensation received from Govt on accuisation of Property .

 

Many times govt accuires property for development purposes like construction /widening of road , railway line, flyover   etc in such cases govt pays compensation to Owner of property, Taxability depends upon nature of property , If property is in urban area , such compensation is treated as capital gain /Loss from property as taxed accordingly, If property is in rural area under agriculture land it is not taxed

 If interest if paid due to delayed compensation it is Taxed under “income from other Sources”

 

7.Compensation received from Govt on account of Natural Calamity like flood , Earthquake, Rail/Road accident ,collapse of building , Flyover , Bridge etc

 

Any compensation received from Govt. on death or disablement due to any types of natural calamity, collapse of building or flyover, railway accident or other accident or incidents is not taxable in hands of recipient.

 

8. Reimbursement of medical expenses on account of medical insurance policies (Compensation by Insurance Company)

in such case payment is made either in two ways mode  1. Cashless Treatment and 2. Reimbursement  of Medical Expenses

In case of Cashless Treatment matter is settled by insurance co directly with Hospital , so no question of Tax payment arise.

In case of reimbursement of Medical expenses , Insurance company pays actual on the basis of submitted vouchers/Bills so it is not an income in the hand of recipient so no Tax is Payable.

 

 

9.Compensation by General  Insurance Company on account of damage of Insured property Like car Insurance , House Insurance , Marine Insurance , Stock  Insurance etc

If compensation is more than fair market value of Property it is treated as Capital gain and Taxed accordingly

In case of Stock insurance  compensation , the amount received is treated as Profit or Loss from Business or profession and Taxed accordingly

 

Hope most points are clarified , for any doubt please contact in person, Thanks

 

@Ajit