Section 10(10BC) of the Income Tax Act, 1961, provides an exemption for compensation received by an individual (or legal heirs) from the Central/State Government or a local authority due to a disaster. This exemption applies to compensation received for:
- Deathcaused by a disaster
- Injury or damageto health due to a disaster
- Damage/destruction of a house or building(excluding a commercial property)
Key Features of Section 10(10BC)
- Full Exemption:
The entire compensation received is tax-free, with no upper limit.
- Eligible Payers:
Compensation must be received from:
- Central Government
- State Government
- Local Authority (Municipal Corporation, Panchayat, etc.)
- Any other authority designated by the government
- Disaster Definition:
Includes natural calamities (earthquakes, floods, cyclones) and man-made disasters (terrorist attacks, riots, industrial accidents).
- Exclusions:
- Compensation for business or commercial property lossis not exempt.
- Compensation from private insurance companies or employersdoes not qualify.
Examples of Tax Exemption Under Section 10(10BC)
Example 1: Compensation for Death in a Natural Disaster
Scenario:
Mr. X dies in a flood disaster. His family receives ₹10 lakh as compensation from the State Government.
Tax Treatment:
- Full ₹10 lakh is tax-exemptunder Section 10(10BC).
- No tax liability for the family.
Example 2: Compensation for Injury in a Terrorist Attack
Scenario: Ms. Y is injured in a terrorist attack and receives ₹5 lakh as compensation from the Central Government.
Tax Treatment:
- Entire ₹5 lakh is tax-freeunder Section 10(10BC).
Example 3: Compensation for House Damage in an Earthquake
Scenario:
Mr. Z’s residential house is destroyed in an earthquake. The government provides ₹7 lakh as rehabilitation aid.
Tax Treatment:
- ₹7 lakh is fully exemptfrom tax.
Example 4: Compensation from Private Insurance (Not Exempt)
Scenario:
A factory worker loses his home in a cyclone and receives ₹3 lakh from a private insurance company.
Tax Treatment:
- Not exemptunder Section 10(10BC) (since it’s not from the government).
- Taxable as “Income from Other Sources”(unless covered under another exemption).
Comparison with Other Disaster-Related Tax Benefits
| PROVISION | SECTION 10(10BC) | SECTION 10(10D) – INSURANCE MATURITY | SECTION 80G – DONATIONS FOR DISASTER RELIEF |
| Nature | Compensation from Govt. for disaster loss | Life insurance payouts (exempt) | Donations to disaster relief funds (deduction) |
| Exemption Limit | No limit | Full exemption if conditions met | 50%-100% deduction (depends on fund) |
| Who Benefits? | Disaster victims | Policyholders | Donors |
