Ex gratia meaning is derived from a Latin term that literally means ''by favor'' or ''as a gift''.

Ex-gratia payment in the corporate world is a payment that is voluntarily given by the employers to their employees as a goodwill gesture.

What is Ex Gratia Payment?

It constitutes a type of voluntary payment that depends upon the employees'' discretions rather than having any legal boundation.

These payments are mainly provided by the employer to help employees in their financial crisis, to end legal disputes, or issues regarding employment contracts.

Ex-gratia payment is also generally used to pay back the losses of large-scale disasters like COVID, earthquakes, and so on as a token of humanitarian support.

Both Ex-Gratia and Bonus

Bonus or appraisals are not the same thing as ex-gratia.

The bonuses are paid to employees after their performance review to appreciate the productivity and KPIs achieved during their tenure.

However, an ex gratia payment is not done for every employee and does not have any kind of set frequency. It''s like a type of voluntary payment disbursed on special occasions as per the requirements.

How to Apply for Ex Gratia Payment?

When faced with a critical financial situation, an employee will have the opportunity to discuss his or her problems with his immediate employer or the HR professional to seek ex-gratia. The application process is variable since it''s per the rules of the organisation; hence, employees shall contact their HR or go through the HR Handbook. However, some organisations almost invariably follow this protocol:

Step 1: Face-to-Face Discussion

As we already 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 listing of documents starts and the procedure gets going as soon as possible to get early clearance. As an HR professional, it''s your responsibility how you will guide your employees through the process of documentation.

Step 3: Agreement

Once your documentation process is complete, a formal agreement would be drafted including the details of ex gratia payment offered, purpose, terms and conditions, and more.

Before acknowledging the agreement, make sure that you read the agreement carefully and resolve all your doubts before e-signing it.

Step 4: Payment

Ex-gratia payment will be processed in the employee''s account as per the agreed terms and conditions after your acknowledgement. The amount may or may not be paid in installments or in one lump sum depending on the negotiation and terms decided.

Is Ex Gratia Payment Taxable?

Well, since ex-gratia payment is not legally binding and is volunteer payment, the 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 decide the applicability of taxation rules:

• Termination: If ex-gratia falls under the F&F settlement and under the tax slab of the Income Tax Act, 1959, of India, then it would be considered to that extent as taxable.
• Compensation: In most cases, whenever there is any settlement between the employee and the employer regarding any legal dispute through ex gratia compensation, the amount will be taxable.
• Gift or Favor: When the 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:

• Retrenchment Fees: According to Sec 10(10C) of the Income Tax Act, compensation received by employees on account of termination of employment is exempt, subject to a specified limit.
• Legal Settlements: Ex-gratia payment made for the settlement of legal disputes may or may not attract tax liability, depending upon the nature of the settlement.

Rest, rules in India for ex gratia payment may change with amendments which normally get 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 measure to boost your relationship with employees and value their presence at your workplace at the very time when they need you the most for financial assistance.

Keep provisions for ex-gratia payments in the employment contracts and inform them about their rights and other provisions given in the HR handbook, induction program.