Ex Gratia Payment Meaning
Ex gratia meaning holds its roots in Latin term that means ‘by favor’ or ‘as a gift’.
In the corporate realm, ex gratia payment refers to voluntarily payment offered by employers to their employees as a gesture of goodwill.
In this glossary, let’s understand in detail about ex-gratia payment:
What is Ex Gratia Payment?
Ex gratia payment is voluntary in nature depending upon the discretion of employees, rather having any legal boundation.
In most cases, these payments are offered by employers to assist their employees in financial crisis, settle legal disputes or concerns related to employment contract.
Also, ex gratia payments are commonly transferred to compensate the losses of major disasters like COVID, earthquake and more as the gesture of humanitarian aid.
Difference between ex-gratia and bonus
Bonus or appraisals are different from ex-gratia payments.
Bonuses are paid to employees after their performance review to appreciate their productivity and KPIs achieved during their tenure.
While ex gratia payments are not made to each employee and do not have any set frequency. It is a voluntary payment disbursed on special occasions as per the requirements.
How to Apply for Ex Gratia Payment?
When employees are in dire need of financial assistance, they can have discussions with their employer or HR professional to apply for ex gratia.
The process of application varies as per organisation’s rules, so employees are advised to contact their HR or go through the HR Handbook.
However, commonly followed protocol by most of the organisations are-
Step 1: Face-to-face discussion
As we previously mentioned, the whole process starts with a one-to-one conversation with the person concerned.
But sometimes employees are unaware of the provision of ex-gratia payment. So, make sure to inform them during their induction program so that they can start conversation as and when required.
Step 2: Documentation
After discussion, as an employee, you might have to submit required documents as evidence and some documents might be required for the approval process.
Make sure to list down the documents and start the procedure as soon as possible for early clearance. As an HR professional, it’s your responsibility to guide your employees through the process of documentation.
Step 3: Agreement
Once your documentation process is completed, a formal agreement will be drafted including the details of ex gratia payment offered, purpose, terms and conditions and more.
Before acknowledging the agreement, make sure you read the agreement carefully and resolve all your doubts before e-signing it.
Step 4: Payment
After your acknowledgement, ex gratia payment will be processed in the employee’s account as per the agreed terms and conditions. The amount could be paid in installments or as a lump sum as per the negotiation and terms decided.
Is Ex Gratia Payment Taxable?
As ex gratia payment is not legally binding and is volunteer payment, taxability rules and regulations of ex-gratia payment vary with situations.
Let’s understand how!
Taxability Rules for Employer
While making the financial report, many organisations consider ex-gratia payment as their business expenses, legal settlements, employee benefits and apply for the deductible expenses for taxation purposes
Taxability Rules for Employee
In case of ex gratia payments, there could be three different situations which decides the applicability of taxation rules:
- Termination: If ex-gratia is included in F&F settlement and qualifies under tax slab of Income Tax Act of India, then up to the certain limit it would be taxable.
- Compensation: When the employee and employer settle any legal dispute with ex gratia compensation, then the amount will be taxable in most cases.
- Gift or Favor: When employer offers the ex-gratia payment as humanitarian aid, then the payment will be completely tax-free.
Ex Gratia Payment Rules in India
Ex gratia payment rules in India are governed by the Income Tax Department. Here are the major rules:
Severance Payments
As per Sec 10(10C) of the Income Tax Act, payments received by employees as compensation for the termination of employment are eligible for exemption, up to a specified limit.
Legal Settlements
Ex gratia payments made for legal disputes’ settlement might be subject to tax based on nature of settlement.
Rest, rules in India for ex gratia payment might change with amendments which are generally proposed in the financial budget. So, one needs to update with the latest regulations while filing for ex-gratia payments.
Summing Up
Ex-gratia payment is a means to strengthen your relationship with employees and value their presence at your workplace at the time when they need you the most for financial assistance.
Make sure to have provision of ex-gratia payments in employment contracts and do not forget to inform them about their rights and other provisions in HR handbook and during induction program.