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tarun (Advocate)     16 September 2008

Taxation of Compensation money

hello friends..

 i wish to know whether the compensation money given by govt. as relief  to  the victims of accidents/natural disaster  is taxable ?

if yes then ..whether it is given after deducating TDS ?

and how income tax is affected by it?


 4 Replies

prof s c pratihar ( urologist &legal studies)     19 September 2008

Black"s law dictionary(revised 4th edition.p906)defines the term income as cannoting the return of money from one"sbusiness labour or capital invested,gains ,profits or private revenue."income" means an amount of money coming to a person or corporation within a specified time or regularly whether  as payment for services ,interest or profit from investment.the dictionary meaning specifies the regularity ofthe return and the presence of some source from which the receipt is derived. to me it is  not a income,however i may be wrong

D.V.RamaKrishna (Advocate)     29 September 2008


Compensation amount received or receivable from Central Or State Govt. or Local authority on account of "disaster" is just like an ex-gratia amount given to the victim. This amount is not included as income either in the definition of Income under Sec.2(24) or Sec. 28 or in Sec. 56(2) of Income Tax Act, 1961. Thus this cannot be termed as income for purpose of taxation.

In order to remove the ambiguity regarding taxing of the compensation received on account of disaster, the Finance Act, 2007 has inserted a new clause (10BBC) in section 10 of IT Act. This clause provides that any amount recieved or recievable from the Central Government or a State Govt. or a local authority by an individual or his legal heir by way of compensation on account of disaster shall be exempt. This exemption is applicable from the assessment year 2005-06, i.e. amounts recieved/recievable from 1-4-2004.

However, out of this compensation, the amount which was allowed as deduction either in business or otherwise, allowed as deduction under the other provisions of the Act, is to be excluded and only the balance is exempt.

The expression "disaster" shall have the same meaning as defined under clause(d) of section 2 of the Disaster Management Act, 2005. Under this clause "disaster" means catastrophe, mishap, calamity or grave occurance in any area, arising from natural or man0de causes, or by accident or negligance which results in substantial loss or life or human suffering or damage to and destruction of property or damage to or degradation of environment and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area.

In view of the exemption allowed U/s 10(10BC)  the amount is includable as income in the computation of income for tax purposes. However the amount recieved is to be shown as exempted income. Since entire amount recieved is exempt for tax purposes,  there is no tax deduction under any provisions of the Act, i.e from 192 to 194LA.


tarun (Advocate)     01 October 2008

Thanks for such nice info sir.. must say this site is rocking .



ca.bhupendrashah (FCADISA)     01 October 2008

not after amendment

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