Finance Bill, 2022 has proposed for income-tax exemption of amount received for medical treatment and on account of death due to COVID-19 by an employee from his employer or from any other person during the financial year 2019-20 and subsequent years. These amendments are proposed to take retrospective effect from 1st April 2020 or Assessment Year 2020-21.
The exemption is provided for the recipient of the amount for COVID-19.
The tax exemption is allowed to the following recipients-
Note: 1. It is proposed to provide income-tax exemption to ex-gratia payment received by family members of a person from the employer of such person or from other person on the death of the person on account of Covid-19 during FY 2019-20 and subsequent years. The exemption shall be allowed without any limit for the amount received from the employer and the exemption shall be limited to Rs. 10 lakh in aggregate for the amount received from any other persons.
2. No condition as to treatment in a government hospital or private hospital etc. is prescribed in the Act. Hence, the treatment may be undertaken in any hospital including home care and COVID Care Centre.
3. The exemption covers receipt of reimbursement of actual expenditure for medical treatment in respect of any illness relating to COVID-19 which shall, in author’s view, include expenditure incurred during quarantine/isolation due to COVID positive.
4. The ceiling of Rs. 10 Lakh exgratia amount shall apply only in case of receipt of the same from non-relatives as any amount received from any relative is anyway excluded from the applicability of section 56(2)(x) vide clause (i) to first proviso to section 56(2)(x).
5. The ceiling of Rs. 10 Lakh (applicable for non-employee cases) is in aggregate and may be received from one or more than one person.
6. The wordings of the proposed amendment in section 56(2)(x) prescribes that tax exemption on receipt of exgratia by the family member of the deceased individual shall be exempt only if the amount does not exceed Rs. 10 Lakh. In case it exceeds Rs. 10 Lakh, the entire amount shall be taxable.
For this purpose, amendments are proposed in Section 17 and Section 56 of the Income-tax Act, 1961 (‘Act’).
Section 17(2) exempts the amount received for reimbursement of actual medical expenditure for treatment of self or his family member for COVID-19 in the hands of the employee from his employer. In case of the death of the employee due to COVID-19, the same will be exempt from tax in the hands of the deceased employee as well as family member.
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Clause (2) of section 17 of the Act, inter alia, provides the definition of “perquisite”. However, certain exceptions have been provided which shall not include as perquisites.
Clause (x) of sub-section (2) of section 56 of the Act inter alia, provides that where any person receives, in any previous year, from any person or persons any sum of money, without consideration, the aggregate value of which exceeds Rs. 50,000, the whole of the aggregate value of such sum shall be the income of the person receiving such sum. However, certain exceptions have been provided in the clause for transactions specified therein.
The Finance Ministry has released a press statement dated 25.06.2021 where it was announced that income-tax shall not be charged on the amount received by a taxpayer for medical treatment from employer or from any person for treatment of COVID-19 during FY 2019-20 and subsequent years.
It was further announced that in order to provide relief to the family members of such taxpayer, income-tax exemption shall be provided to ex-gratia payment received by family members of a person from the employer of such person or from other person on the death of the person on account of COVID-19 during FY 2019-20 and subsequent years.
Also, it was stated that the exemption shall be allowed without any limit for the amount received from the employer and the exemption shall be limited to Rs. 10 lakh in aggregate for the amount received from any other persons.
In order to provide the relief as stated in the press statement, it is proposed to amend clause (2) of section 17 and to insert a new sub-clause in the proviso to state that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in respect of any illness relating to COVID-19 subject to such conditions, as may be notified by the Central Government, shall not be forming part of “perquisite”.
Further, it is proposed to amend the proviso to Clause (x) of sub-section (2) of section 56 and insert two new clauses in the proviso so as to provide that-
(i) any sum of money received by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, in respect of any illness related to COVID-19 subject to such conditions, as may be notified by the Central Government in this behalf, shall not be the income of such person;
(ii) any sum of money received by a member of the family of a deceased person, from the employer of the deceased person (without limit), or from any other person or persons to the extent that such sum or aggregate of such sums does not exceed ten lakh rupees, where the cause of death of such person is illness relating to COVID-19 and the payment is, received within twelve months from the date of death of such person, and subject to such other conditions, as may be notified by the Central Government in this behalf, shall not be the income of such person.
Further, it is proposed to provide that for the purpose of both of the said clauses, “family” in relation to an individual shall have the same meaning as assigned to in Explanation 1 to clause (5) of section 10.
As per Explanation 1 to Section 10(5), the expression "family", in relation to an individual, means—
(i) the spouse and children of the individual; and
(ii) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual.
Interestingly, these amendments will take effect retrospectively from 1st April, 2020 and will accordingly apply in relation to the assessment year 2020-21 and subsequent assessment years.
For this purpose, Clause 10 of the Finance Bill, 2022 amends Section 17 of the Act as given below-
Amendment of section 17.
10. In section 17 of the Income-tax Act, in clause (2), in the first proviso, in clause (ii), after sub-clause (b), the following sub-clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2020, namely:–
“(c) in respect of any illness relating to COVID-19 subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in this behalf:”.
Explaining the amended Provisions of Section 17 to exempt the amount received for COVID-19 from the employer
Clause 10 seeks to amend section 17 of the Income-tax Act relating to the definition of “salary”, “perquisite” and “profits in lieu of salary”.
Clause (2) of the said section, inter alia, provides the definition of the term “perquisite” and proviso to the said clause provides certain exclusions which shall not be part of “perquisite”.
Clause (ii) of the said proviso provides that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in certain specified cases shall not be part of perquisite.
It is proposed to amend the said clause (ii) to insert a new sub-clause to provide that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in respect of any illness relating to COVID-19 subject to such conditions, as may be notified by the Central Government in this behalf, shall not be forming part of “perquisite”.
Similarly, Clause 16 amends Section 56(2)(x) in the following manner-
Amendment of section 56.
16. In section 56 of the Income-tax Act, in sub-section (2),–
(a)......
(b) in clause (x),–
(i) in the proviso occurring after item (B) in sub-clause (c), after clause (XI) and before the Explanation, the following clauses shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2020, namely:–
‘(XII) by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, for any illness related to COVID-19 subject to such conditions, as the Central Government may, by notification in the Official Gazette, specify in this behalf
(XIII) by a member of the family of a deceased person–
(A) from the employer of the deceased person; or
(B) from any other person or persons to the extent that such sum or aggregate of such sums does not exceed ten lakh rupees,
where the cause of death of such person is illness related to COVID-19 and the payment is––
(i) received within twelve months from the date of death of such person; and
(ii) subject to such other conditions, as the Central Government may, by notification in the Official Gazette, specify in this behalf.
Explanation.–For the purposes of clauses (XII) and (XIII) of this proviso, “family”, in relation to an individual, shall have the same meaning as assigned to it in Explanation 1 to clause (5) of section 10.’;
(ii).....
Explaining the Provisions of Section 56(2)(x) which exempt amount received from any person for COVID-19
Clause 16 seeks to amend section 56 of the Income-tax Act relating to income from other sources.
Sub-section (2) of the said section provides that certain incomes as provided therein shall be chargeable to income-tax under the head “Income from other sources” without prejudice to the generality of the provisions of sub-section (1) thereof.
The existing provisions of clause (x) of sub-section (2) of the said section of the Income-tax Act, 1961 (the Act) inter alia, provides that where any person receives, in any previous year, from any person or persons any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum shall be the income of the person receiving such sum.
Proviso to the said clause provides for certain exclusions which shall not be part of the income specified in the clause.
It is proposed to amend the said proviso to insert two new clauses (XII) and (XIII) so as to provide that–
(i) any sum of money received by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, in respect of any illness related to COVID-19 subject to such conditions, as may be notified by the Central Government in this behalf, shall not be the income of such person;
(ii) any sum of money received by a member of the family of a deceased person, from the employer of the deceased person, or from any other person or persons to the extent that such sum or aggregate of such sums does not exceed ten lakh rupees, where the cause of death of such person is illness relating to COVID-19 and the payment is, received within twelve months from the date of death of such person, and subject to such other conditions, as may be notified by the Central Government in this behalf, shall not be the income of such person.
It is also proposed to insert an Explanation to provide that for the purpose of both of the said clauses (XII) and (XIII) of this proviso, “family” in relation to an individual shall have the same meaning as assigned to in the Explanation 1 to clause (5) of section 10.
Inconsistency in Press Release and Statutory amendments
On 25th June 2021, the government had issued a Press Release to announce the exemption of the amount of exgratia/reimbursement received on account of COVID-19.
At that time, it was stated that necessary legislative amendments will be carried out in the statute in due course of time; which has happened in Finance Bill, 2022. With these amendments, statutory recognition is given to the press note.
However, the followings are the noteworthy inconsistencies in the announcement by the Press Release and the proposed amendments in Finance Bill, 2022-
Extract of Press release dated 25.06.2021 on Income-tax exemption on Ex Gratia to Employees for COVID-19
A. Tax exemption
I. Many taxpayers have received financial help from their employers and wellwishers for meeting their expenses incurred for treatment of Covid-19. In order to ensure that no income tax liability arises on this account, it has been decided to provide income-tax exemption to the amount received by a taxpayer for medical treatment from employer or from any person for treatment of Covid-19 during FY 2019-20 and subsequent years.
II. Unfortunately, certain taxpayers have lost their life due to Covid-19. Employers and well-wishers of such taxpayers had extended financial assistance to their family members so that they could cope with the difficulties arisen due to the sudden loss of the earning member of their family. In order to provide relief to the family members of such taxpayer, it has been decided to provide income-tax exemption to ex-gratia payment received by family members of a person from the employer of such person or from other person on the death of the person on account of Covid-19 during FY 2019-20 and subsequent years. The exemption shall be allowed without any limit for the amount received from the employer and the exemption shall be limited to Rs. 10 lakh in aggregate for the amount received from any other persons.
Necessary legislative amendments for the above decisions shall be proposed in due course of time.
The proposed amendments are carried out in the line with the above announcement on 25th June, 2021. However, there was no announcement that the exemption will be subject to such conditions as may be prescribed. Moreover, it is important to note that the exemption is available from AY 2020-21. If anyone has claimed exemption based on the Press Release announcements but does not fulfil any of the to be notified conditions, then it is not clear what will happen to the claim of such exemption.
Further, there was no condition as to payment of exgratia amount by any person to the deceased relative within 12 months from the date of death of the individual due to COVID-19.
This condition is above the announcements in the press release related to the exemption of exgratia amount received on the demise of the employee or individual. There is no change in the statutory recognition of the amount of reimbursement received for medical treatment of COVID-19.
A number of employers have decided to continue their monthly salaries till the age of retirement as an ex-gratia measure for those employees who have died due to COVID. Further, many are undertaking to bear the education expenses of their deceased employees’ children.
With the condition of 12 months payment, only the amount paid by the employer to the family member of the deceased employee will remain tax-exempt received or paid till 12 months. Exgratia amount received after the expiry of 12 months will become taxable in the hands of the family member for which no exemption is separately provided. This is contradictory to announcements made in the press release and the statutory recognition given to these announcements by the proposed amendments.
Further, in the press note, it was announced that the exemption shall be limited to Rs. 10 lakh in aggregate for the amount received from any other persons. Thus if the family member of the deceased receives Rs. 12 Lakh, only Rs. 2 Lakh, being in excess of Rs. 10 Lakh, shall be taxable. However, the wordings of the proposed amendment in section 56(2)(x) prescribes that tax exemption on receipt of exgratia by the family member of the deceased individual shall be exempt only if the amount does not exceed Rs. 10 Lakh. In case it exceeds Rs. 10 Lakh, the entire amount shall be taxable. Thus, as per the proposed amendment, if the family member of the deceased receives Rs. 12 Lakh entire amount of Rs. 12 Lakh shall be taxable.
This certainly goes against the policy of a stable and predictable tax regime. Government should reconsider these conditions since the objective of tax exemption is to provide relief to the person who receives the exgratia in distress. This needs reconsideration.
Apart from the inconsistency in statutory amendments and press announcements, there are some other issues for tax exemption on amount received for COVID-19 which need attention.
Definition of the term ‘family’
It is defined by taking the reference from Explanation 1 to clause (5) of section 10. Accordingly, the term “family” in relation to an individual means—
(i) the spouse and children of the individual; and
(ii) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual
It should be noted that section 10(5) defines family in the context of claiming exemption of Leave Travel Assistance/Concession (LTA/LTC).
Family does not include grandchildren in this case.
In case the exgratia amount is received by a person who does not fall under the definition of ‘family’ of the deceased but is a relative under section 56, then whether the exemption under section 56(2)(x) shall apply or not. In the author’s view, the exemption is available as the receipt of any amount from a relative is separately exempt from taxation u/s 56(2)(x).
For example, if money is received by the husband from his wife’s brother (brother-in-law or Sala), due to the death of his wife on account of COVID shall be exempt from tax u/s 56(2)(x). Even though brother-in-law or Sala does not come under the definition of ‘family’.
It should be noted that receipt of any money without any consideration from a relative is anyway exempt whether received upon death or otherwise.
Clarification on the expression ‘in respect of any illness related to COVID-19’
The statute has used the expression ‘in respect of any illness related to COVID-19’ and not on account of COVID-19. There are certain situations where a person may have died due to cardiac arrest (or heart attack) when he was COVID positive. The report will state that he died of heart failure. But the cardiac arrest happened due to COVID which is squarely covered by the expression ‘in respect of any illness related to COVID-19’.
But tax authorities may dispute such deaths. This expression needs clarification.
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