Exemption for Compensation received or receivable on account of any Disaster [Section 10(10BC)] – Direct and Indirect Taxes with Tax Ready Reckoner

When a disaster strikes, it can cause immense damage to life and property. In such difficult times, the government and various organizations provide compensation to the affected individuals and businesses to help them recover and rebuild. However, it is important to understand the tax implications of such compensation.

Under Section 10(10BC) of the Income Tax Act, any compensation received or receivable on account of any disaster is exempt from tax. This means that the compensation amount will not be included in the taxable income of the recipient.

It is important to note that this exemption is applicable only in case of compensation received on account of a disaster. The term ‘disaster’ refers to a catastrophe, such as floods, earthquakes, cyclones, etc., that causes widespread damage and loss.

The exemption under Section 10(10BC) applies to all types of compensation received or receivable on account of a disaster. This includes compensation received from the government, non-governmental organizations, insurance companies, or any other source.

It is also worth mentioning that the exemption is available for both individuals and businesses. So, whether you are an individual who has suffered losses due to a disaster or a business that has incurred damages, the compensation received will be exempt from tax.

However, it is important to keep proper documentation and evidence of the compensation received. This includes documents such as receipts, letters of approval, or any other relevant documents. These documents will help in substantiating the claim of exemption in case of any scrutiny by the tax authorities.

The exemption under Section 10(10BC) is available for all types of compensation received on account of a disaster, including:

Monetary compensation from the government or other agencies
Insurance payouts
Donations from individuals or organizations
The value of goods or services received

It is important to note that the exemption under Section 10(10BC) is not available for compensation received for the following:

Loss of business
Personal injury
Damage to property that is not used for residential purposes
Damage to property that is insured

Conditions:

The following conditions must be met for the exemption to be available:

The compensation must be received or receivable from the Central Government or State Government or a local authority.
The compensation must be received or receivable on account of any disaster.
The exemption under Section 10(10BC) is available only for compensation received on account of a disaster. It is not available for compensation received for other reasons, such as theft or vandalism.
To claim the exemption under Section 10(10BC), you must file your income tax return and disclose the amount of compensation received. You may also be required to provide documentation to support your claim, such as a copy of the insurance policy or a letter from the government authority that awarded the compensation.
The term “disaster” is defined to include any disaster due to any natural or man-made causes or by accident or negligence which results in substantial loss of human life or damage to property or environment and the magnitude of such disaster is beyond the coping capacity of the community of the affected area.

If all of the above conditions are met, then the compensation received or receivable on account of any disaster will be exempt from income tax in the hands of the recipient.

Examples:

Here are some examples of cases where the exemption under Section 10(10BC) will be available:

A person receives a compensation of Rs. 10 lakh from the Central Government for the loss of his property due to an earthquake. The entire amount of the compensation will be exempt from income tax.
A person receives a compensation of Rs. 5 lakh from the State Government for the medical expenses incurred by him due to a flood. The entire amount of the compensation will be exempt from income tax.
A person receives a compensation of Rs. 3 lakh from a local authority for the loss of his business due to a fire. The entire amount of the compensation will be exempt from income tax.