The woman Roopa had lost her husband along with two others in a rain-related mishap recently.
The Bruhat Bengaluru Mahanagara Palike (BBMP) said the cheque was dishonoured because they had blocked the payment.
BBMP's taxation and finance committee chairperson M K Gunashekar said there is a controversy within Roopa's family.
The deceased man's parents and wife are laying claim to the compensation, he said. "Unless the dispute within the family is resolved, we will not pay the money," he said.
Bengaluru Mayor G Padmavathi had given her a cheque of Rs five lakh as compensation. When she deposited the cheque, it was dishonoured.