Payment of salary in case of death of employee while in service

Ask the Community Income Tax
1

In case of death while in service, following payments are paid to spouse / legal heir.

  • Salary for current month
  • Gratuity
  • Full & final settlement / Leave encashment / Bonus etc

These payments are processed in deceased employees profile but bank payment is to be made in favor of spouse / legal heir.

  • Whether these payments to be processed in payroll as usual ?
  • Whether these payments will taxable in hands of employees ?
  • If not, whether such payments to be processed out of payroll since spouse name is not in payroll record & to be paid as non taxable? How to show these payments in TDS returns?
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3

Hey @sneham95 .

In the unfortunate event of an employee’s death while in service, the payment of salary, gratuity, and other final settlements to the deceased employee’s spouse or legal heir raises several questions related to payroll processing, taxation, and TDS (Tax Deducted at Source) returns. Here’s a breakdown of how these payments should generally be handled:

  1. Processing in Payroll:
  • Salary for the Current Month: The salary for the current month that was due to the deceased employee should be processed as usual through the payroll system.
  • Gratuity, Leave Encashment, Bonus, etc.: These final settlements should also be processed in the payroll system.
  1. Taxability:
  • Salary for the Current Month: This will be taxable as it would have been if the employee were alive.
  • Gratuity: In India, as per the Income Tax Act, gratuity received by an employee (or his/her legal heir in the event of death) is exempt from tax up to a certain limit based on the length of service. Any amount exceeding this limit will be taxable.
  • Leave Encashment: The taxability of leave encashment depends on various factors, including the terms of the employment contract and the relevant tax laws. In India, leave encashment received by an employee (or his/her legal heir in the event of death) is taxable if it exceeds the permissible limits specified by the Income Tax Act.
  • Bonus: Bonuses paid to the legal heir or spouse of the deceased employee are typically taxable in the same manner as they would have been if paid to the employee directly.
  1. Payment to Spouse/Legal Heir:
  • Although the payments are processed in the deceased employee’s profile, the bank payment should be made in favor of the spouse or legal heir.
  • The payments can still be processed through the regular payroll system, even if the spouse’s name is not in the payroll record.
  1. TDS Returns:
  • The TDS should be deducted as per the applicable tax rates on each component (salary, gratuity, leave encashment, bonus, etc.).
  • The TDS returns should reflect the tax deducted against the deceased employee’s PAN (Permanent Account Number).
  • If the total income of the deceased employee is not taxable after considering the exemptions and deductions applicable to the deceased employee, the TDS can be refunded to the legal heir by filing an income tax return on behalf of the deceased.

Hope this helps.

Priya

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4

Thanks Priya. It helps.

So basically all payments will be taxed in the hands of deceased employee subject to exemptions available for relevant payments as it would have been if the employee were alive

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