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A sudden payout during a difficult moment can raise more questions than relief. Whenever a company lays off people and adds an extra amount, termed “ex Gratia,” it is usually kept separate from salary, bonus, or statutory dues. It comes with no promise, no pre-defined structure, and no legal obligation behind the payment. It is simply a discretionary decision by the employer, insurer, or authority to react to specific circumstances.
It is precisely the lack of formal rules about ex gratia that makes them confusingly significant. They show up under conditions of passage, loss, or exception, and their meaning toggles with context.
A deeper analysis of how such Gratia payments are viewed, decided, and treated helps clarify their role within compensation and support frameworks.
What is Ex Gratia Payment?
Ex Gratia payments are voluntary payments in the nature of gestures on the part of the insurance companies without any liability or admission on their part being established in respect of such payment. This term has a very interesting Latin origin that literally means ‘out of grace’ or ‘by favor’.
Eligibility Criteria:
Though ex Gratia payments are discretionary, certain criteria might still be applied by the employer in deciding who qualifies for the payment. These could include the period of service, the status of the individual at the time of making the payment (whether laid off or resigned), the type of the event (accidents, natural disasters, or retirement), and, of course, their service to the organization. Yet, these still remain discretionary and might differ in every organization and set of circumstances. No person could have any right in law on the basis of service and performance.
Exclusion from Statutory Deductions
- Provident Fund (PF) and Employee State Insurance (ESI) deductions typically do not apply to ex Gratia payments
- Since ex Gratia falls outside regular wages definition, employers need not calculate or contribute PF/ESI percentages
- This exclusion reduces statutory compliance burden while maintaining the payment’s discretionary character
- Proper documentation ensures payroll systems treat ex Gratia distinctly from wage components
Ex Gratia vs Bonus vs Gratuity — Key Differences
Ex Gratia payments are often grouped with bonus and gratuity, even though each follows a very different logic. Their distinctions lie in legal backing, eligibility, calculation methods, and employee rights. The table below breaks these differences down clearly.
| Aspect | Ex Gratia | Bonus | Gratuity |
| Legal basis | Voluntary payment with no statutory obligation | Mandated under the Payment of Bonus Act, 1965 | Mandated under the Payment of Gratuity Act, 1972 |
| Eligibility | Decided solely by the employer | Employees with Basic + DA up to ₹21,000 per month | Employees completing five years of continuous service |
| Nature of payment | Goodwill or support-based payout | Performance and profit-linked statutory benefit | Tenure-based retirement or exit benefit |
| Calculation method | No fixed formula or standard | 8.33% to 20% of annual salary | (Last drawn salary * 15/26 * years of service) |
| Amount limits | No minimum or maximum limits | Capped at 20% of annual salary | Capped at ₹20 lakh (current limit) |
| Payment timing | Situation-specific and discretionary | Typically annual | Payable on retirement, resignation, death, or disability |
| Employee right | No enforceable claim | Legal entitlement for eligible employees | Legal entitlement after qualifying service |
| Tax treatment | Taxable as profits in lieu of salary | Taxable as salary income | Exempt up to limits under Section 10(10) |
| PF / ESI applicability | Generally excluded from wage calculations | Included for PF/ESI purposes | Not applicable |
Note: Ex Gratia exists outside statutory compensation structures. Unlike bonus and gratuity, it carries no predefined rules, caps, or enforceable rights, making it a purely discretionary payout.
When Do Companies Pay Ex Gratia Payments?
Ex Gratia payments usually arise in situations where formal compensation frameworks fall short, yet a goodwill response feels appropriate. These payouts indicate management discretion rather than contractual obligation and are generally approved at senior levels. The following cases illustrate when organisations would normally decide to make ex Gratia payments.
- Workforce Restructuring and Separation
Ex Gratia is usually paid over and above the statutory severance pay during layoffs, retrenchments, or voluntary retirement schemes. This amount could serve to help tide over sudden transitions that employees may have to go through, while on the other hand, letting the organizations handle such restructuring issues with more empathy and goodwill.
- Workplace Accidents, Injuries, and Deaths
For instance, in cases of serious injury or loss of life, ex Gratia compensation may be allowed by companies to employees or their families. Payments such as these can offer immediate support and recognize human costs associated with certain incidents above and beyond what is covered under insurance or by law.
- Employee Relocation Support
Relocations may also involve several expenses that may not be taken care of under general insurance plans. Hence, ex Gratia helps the employee to take care of the expenses of moving and staying during the initial period of adjustment if the need to relocate the business arises.
- Service Failures and Customer Compensation
During service disruptions or failures in service delivery, ex Gratia compensation is offered by organizations on a goodwill basis, which helps in maintaining customer trust, regardless of the contractual obligations not being fulfilled in such regards.
- Natural Disasters and Emergencies
Following natural calamities or large-scale emergencies, organizations often extend ex Gratia support to affected employees or families. This helps in providing immediate relief measures in situations of crisis.
- Corporate Social Responsibility and Charity
Ex Gratia funds are also used to support humanitarian and civic initiatives across society. These are a display of corporate social responsibility and not a necessity, showing goodwill going beyond the confines of work.
Legal & Regulatory Framework for Ex Gratia in India
Ex Gratia payments do not have any legal requirements, but they do exist within an overall legal compliance model. Comprehending this can help deal with these kinds of payments in an organization.
Payment of Bonus Act, 1965
- Ex Gratia payments remain outside the scope of the statutory bonus framework defined under this Act.
- Employees earning above the Basic + DA eligibility threshold receive any bonus-like payouts only as ex Gratia.
- Even for eligible employees, amounts paid beyond the statutory bonus ceiling qualify as voluntary ex Gratia
Payment of Gratuity Act, 1972
- The Act specifies when gratuity becomes payable and how it must be calculated.
- Any payment exceeding the statutory gratuity amount is treated as ex Gratia.
- Enhanced separation or exit packages commonly split payments into gratuity and ex Gratia components.
Provident Fund and ESI Regulations
- Ex Gratia is not a component of any fixed wages or salary.
- Nor are such discretionary payments subject to PF or ESI contributions.
- Clear classification and documentation can eliminate potential compliance issues or audit problems.
Income Tax Act, 1961
- Ex Gratia payments from employers are treated as taxable income.
- They fall under “profits in lieu of salary” for taxation purposes.
- Employers typically apply TDS in line with applicable income tax slabs.
Internal Policy and Governance
- Organisations should clearly define situations where ex Gratia may be considered.
- Approval levels and review systems also help avoid inconsistency in making decisions.
- Establishing documented guidelines in this regard ensures that the decision to grant ex Gratia remains discretionary rather than an entitlement.
Tax Implications of Ex Gratia Payments in India
Ex Gratia payments received from an employer are treated as salary income under the Income Tax Act. Section 17(3) classifies such payouts as “profits in lieu of salary,” which means the full amount becomes taxable in the year it is received. The payment is added to the recipient’s total income and taxed according to the applicable slab rates, with no specific exemptions or deductions usually available.
In rare situations, the government has granted relief. During the COVID-19 pandemic, limited exemptions were introduced for ex Gratia paid to families of deceased individuals. These exemptions applied only to notified cases and capped amounts, reflecting the exceptional nature of the circumstances.
For large lump sum payments, especially during separation, Section 89(1) offers potential relief. By filing Form 10E, recipients can reduce the tax impact caused by income being concentrated in a single year.
Employers must deduct TDS on ex Gratia payments as they would on salary. While PF and ESI do not apply, properly documented ex Gratia payouts remain deductible business expenses.
How Is Ex Gratia Calculated? (Examples)
Ex Gratia payments cannot be computed according to any formula, but in practice, most organizations do not choose them at random. Organisations seem to depend on their own frameworks while considering fairness and consistency, along with their business needs and the discretionary nature of the payment.
Many companies base ex Gratia on salary multiples or service tenure. Common methods include:
- Fixed Months’ Salary: Paying a specific number of months’ gross or basic salary (e.g., 3 months’ salary as separation ex Gratia)
- Service-Based Calculation: Multiplying days or months of salary by years of service (e.g., 15 days’ salary per completed year)
- Percentage of Annual Compensation: Allocating a percentage of annual CTC as ex Gratia
- Loss Severity Assessment: Calculating based on actual financial impact or hardship (for accident compensation)
- Flat Amounts: Providing uniform amounts to all affected individuals in similar circumstances
Example calculation
A company announces an ex Gratia payout for employees impacted by an office closure. Its internal policy provides one month of basic salary for every completed year of service.
Basic salary: ₹40,000 per month
Service tenure: 7 years
So, Ex Gratia amount = ₹40,000 * 7
Total ex Gratia payable: ₹2,80,000
Regardless of methodology, businesses should:
- Apply chosen methods consistently across similar cases
- Document calculation rationale for audit trails
- Ensure amounts reflect genuine goodwill intent
- Consider recipient circumstances and company capacity
- Avoid creating precedents implying future obligations
Best Practices for Employers Managing Ex Gratia
Ex Gratia usually occurs at critical times such as lay-offs, emergency situations, or unexpected changes. How they are handled matters as much as the amount itself.
The following checklists can help in the responsible administration of the payment of ex Gratia amounts:
Establish Clear Internal Policies
- Specify circumstances when ex Gratia may be applicable
- Document eligibility criteria and calculation logic
- Establish a timetable for approval and payment
Maintain Defined Approval Hierarchies
- Link approval authority to payout size
- Require senior or board approval for high-value payments
- Ensure decisions are reviewed, not made in isolation
Communicate Transparently with Recipients
- Clearly state that ex Gratia is voluntary and discretionary
- Avoid language that suggests entitlement or precedent
- Share communication in writing for clarity and record
Document Decisions and Payments
- Retain approval notes and justification records
- Preserve calculation worksheets and payment proofs
- Maintain recipient acknowledgements where applicable
Factor in Tax and Compliance Considerations
- Apply TDS correctly based on projected income
- Inform recipients about tax treatment and reporting
- Flag Section 89(1) relief where lump sums apply
Conclusion
Ex Gratia payments offer greater potential in realizing organizational empathy and corporate social responsibility in unusual situations. Unlike other bonus and gratuity payments, which are statutory in nature and have specific laws and formulas attached, ex Gratia payments remain entirely voluntary and not restricted by any legal obligations, specific conditions for being eligible, or any limitations on the ex Gratia payments made to employees.
If carried out in a thoughtful way, ex Gratia can foster trust, internal culture, and even commitment in a way that is not dictated by a contractual relationship or a legal obligation. This is because discretion is correlated with responsibility in a way that turns goodwill into a broader stakeholder impact.
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FAQs on Ex Gratia Payment
What is an Ex Gratia Payment in Salary?
The term ‘ex Gratia’ is defined as a voluntary payment made by an employer and is not specified in the employment agreement or governed by law, often during a lay-off situation or an emergency.
Is ex Gratia a part of CTC?
Usually, ex Gratia is not included in CTC as it is not a guaranteed component in terms of pay and depends on what the employer decides to pay in special circumstances.
How is Ex Gratia calculated in salary?
There’s no specific formula for it. It could be related to basic pay, tenure, or a lump sum, and it varies case by case and entirely depends upon the company’s policies and intentions.
Who typically receives ex Gratia payments?
Employees whose services are terminated due to layoffs, accidents, or unforeseen circumstances are eligible for ex Gratia benefits. This is also applicable for the families of employees passing away and even for the case of voluntary retirement schemes.
At what stage should ex Gratia payments be made?
Normally, Ex Gratia is granted during the employee separation period or when there are cases of disaster relief or any such incidents that require discretion to give assistance.
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