Is compensation received by insurance taxable under ITR

867 votes

Section 45(1A) of the Income Tax Act 1961 (the Act) has been inserted in the Act and in case the following two conditions are satisfied, any profit or gain arising from the receipt of such insurance amount shall be chargeable to income tax under the head 'capital gain'. The conditions required to be satisfied are:
The compensation is received because of damage or destruction of any asset.
The damage or destruction is a result of four categories of circumstances, viz, (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire explosion; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war).
If the aforesaid two conditions are satisfied, then Section 45(1A) of the Act would be attracted and such insurance amount would be treated as full value of consideration received or accruing as a result of transfer of the capital asset for the purpose of computing capital gain under Section 48 of the Act. Therefore, in case the depreciated value of block Plant and Machinery as on the date of fire was X and insurance amount received was X plus the excess amount would be chargeable to tax under head capital gain.

Thanks

Advocate Angad Gulati LawRato

692 votes

Hello Client,
As per Section 45(1A) of the Income Tax Act, the compensation received for loss caused by accidental fire explosion as an insurance amount would be treated as full value of consideration received or accruing & so would be chargeable to tax under head capital gain.

Good Luck!

Advocate Tulasa Neupane LawRato