My husband passed away while he was employed with a public sector company. I receive a monthly monetary cash compensation in lieu of employment offered to me. Is the compensation taxable?

—Reema Swarup

It is not fully clear from the facts whether you are receiving a monthly cash compensation in lieu of actual employment services rendered by you to the employer or only in lieu of an employment offered to you after your husband’s death but not undertaken by you or family pension. We have presumed that this payment is not in the nature of family pension.

In case the compensation is received against actual services rendered by you under a contract, then the income would be taxable as income from salary in your hands.

However, if the compensation is received otherwise, it may be noted that as per a circular issued by the income tax authorities, any lump sum payment made gratuitously or by way of compensation or otherwise by employer to the widow or other legal heirs of an employee who passes away while still in active service, is not taxable as income under the Income-tax Act, 1961. While the circular refers only to a lump sum payment, a few judicial precedents have held that periodicity of payment cannot determine the taxability of the payment received and it is the true nature of that payment which decides its taxability. Relying on this circular and the judicial precedents, one may construe that monthly voluntary cash compensation received by you shall not be subject to tax. However, considering the specific language of the circular on the periodicity of the payment, litigation in this regard cannot be ruled out.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com

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