Payment to nominee after death of employee

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

25 April 2013 My company has a Staff welfare plan that if any employee die before his retirement, then his nominee has a option to REFUND the Gratuity and PF amount to the company and company will give to the nominee per month a sum equivalent to the last basic salary of employee till his remaining service period. and at last total deposited amount will be refunded.

For example : "A" was an employee. His retirement age was Jan 2022. But he dies on 30th April 2012 when his Basic Salary was Rs. 20,000. His nominee "B" refund his PF and Gratuity amount to the company.

So Company will give Rs. 20,000 per month to "B" till Jan 2022. and on Jan 2022 Co will refund the Deposit amount.

Now please tell me, whether this Rs. 20,000 p.m. is taxable in the hands of "B". and in which section TDS will be deducted.

Points to remember :

1. There is no employer employee relationship between company and "B".

2. PF and Gratuity in the hands of nominee (in case of death) is exempted. But here "B" is returning the money.

3. What disclosure needs in final account.

Thanks please reply soon

CA Krunal

CA Krunal (Expert)
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25 April 2013 I hope your company would be accounting such expenditure under staff cost.

The AO can take view that you are paying an interest for the deposit received in form Gratuity & PF. You need to check whether such amount works out to normal interest rates or not. However on substance of scheme you can prove that this is not interest but its scheme for benefits of staff.

In such case, while making payment no TDS would be required to be deducted.

Querist : Anonymous

Querist : Anonymous (Querist)

26 April 2013 Dear Krunal,
Thanks for your reply.

Amount paid to the Nominee is not at certain rate. and it will never be matched with any interest rate. If we calculate rate of interest, then it may be the rate of each nominee will come different.

But i can't understand how it is benefit to the staff. As last benefit to the staff has been paid to the nominee (PF and Gratuity), and nominee at his own wish deposited that amount to the company. Further, with nominee their is no Employer employee relationship.

So please mention how it can be justified as staff benefit.

Thanks and regards,

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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09 August 2024 The scenario you described involves a company providing a unique benefit to the nominee of an employee who has passed away. Here's how to handle the taxation and disclosure of such payments:

### **Tax Treatment for Payments to the Nominee**

1. **Monthly Payment to the Nominee:**
- The monthly payment of Rs. 20,000 made to the nominee (B) is treated as a regular income in the hands of the nominee.
- Since this payment is not related to any employer-employee relationship (as there is no direct employment relationship between the company and the nominee), the monthly payment is considered as **income from other sources**.
- Therefore, the nominee is liable to pay tax on this amount as per the applicable tax slabs.

2. **TDS on Monthly Payment:**
- The company must deduct TDS on the monthly payment to the nominee as per the provisions of the Income Tax Act.
- **Section 56(2) (x)** deals with income from other sources. TDS should be deducted under **Section 194C** (Payment to contractors) or **Section 194J** (Professional services), as it falls under contractual payments or remuneration.
- The TDS rate will depend on the nature of payment. For general payments, it is typically 1% (if the payment is made to an individual) or 2% (if made to a company or other entities).

3. **Tax Exemption for Gratuity and PF:**
- As you mentioned, the PF and Gratuity amounts are exempt in the hands of the nominee under **Section 10(10) (Gratuity)** and **Section 10(12) (Provident Fund)**.
- However, since the nominee is refunding these amounts to the company and receiving a regular monthly benefit, the tax treatment changes, and the monthly payments are taxable.

### **Disclosure in Final Accounts**

1. **Disclosure of Monthly Payments:**
- The monthly payments made to the nominee should be disclosed in the company’s financial statements under **“Staff Welfare Expenses”** or a similar head, depending on how the company categorizes such expenditures.
- The nature of the payment and the terms of the arrangement should be mentioned clearly in the notes to the financial statements.

2. **Accounting Treatment:**
- The payments made to the nominee should be recorded as an expense in the profit and loss account.
- Any associated TDS deducted should be reflected in the TDS payable account and reported accordingly.

### **Justification as Staff Benefit**

- **Staff Benefit Justification:**
- While this arrangement is not a typical employee benefit, it can be justified as a form of welfare support to the family of a deceased employee.
- It represents a contractual agreement where the company compensates the nominee with a fixed monthly amount in lieu of the returned PF and Gratuity. This could be viewed as a form of financial support extended by the company to the deceased employee’s family.

### **Summary**

1. **Monthly Payments:**
- Taxable as income from other sources in the hands of the nominee.
- TDS should be deducted according to the applicable section (typically Section 194C or 194J).

2. **Disclosure:**
- Mention in financial statements under appropriate expense head.

3. **Justification:**
- Can be justified as a welfare benefit if it aligns with company policy and the intended support to the deceased employee’s family.

Always consult with a tax advisor or legal expert to ensure compliance with the latest tax regulations and accurate reporting.