An extra payment from an employer can appear as “ex gratia” on a payslip or exit settlement. A similar description may appear on a bank statement for a government relief payment. Although the term is the same, the reason for the payment and its tax treatment can differ.
This blog explains ex gratia payments in India, how employers calculate them, how they differ from other employee benefits, and what the Government of India’s 2020 loan-relief scheme covered.
What is an Ex Gratia Payment?
An ex gratia payment is an amount offered voluntarily as a gesture of goodwill, generally without an existing legal or contractual obligation to make that specific payment. The Latin expression “ex gratia” means “by favour” or “out of grace”.
Employers, governments, insurers and other organisations may make these payments. The purpose can include financial assistance, additional support during an employee’s exit, or compensation offered without admitting liability.
Ex Gratia Payment Example
Suppose an employee’s home is damaged in a flood. Their employer decides to provide ₹40,000 in financial assistance, in addition to their normal salary and benefits.
If the employer was not already required to provide that assistance under a contract or applicable law, the additional ₹40,000 can be an ex gratia payment.
The distinction is the reason the amount is payable, rather than its size or the method used to transfer it.
What Does Ex Gratia Mean in Salary?
In salary, ex gratia usually refers to an additional employer payment outside the employee’s regular, guaranteed pay. It may be processed through monthly payroll, an off-cycle payment or a full and final settlement.
For example, an employer might approve a one-time ₹15,000 goodwill payment for eligible employees during a festival. An employee receiving ₹55,000 in normal monthly gross earnings would then have the following illustrative breakdown:
| Earnings component | Amount |
|---|
| Regular monthly gross earnings | ₹55,000 |
| One-time ex gratia payment | ₹15,000 |
| Total gross earnings for the month | ₹70,000 |
This is a gross earnings example. The employee’s take-home amount depends on applicable tax and other deductions.
When included in payroll, the payment should be identifiable as a separate earnings component so the employee can distinguish it from regular pay.
An ex gratia amount can therefore appear in salary records without becoming a guaranteed monthly salary component. Its inclusion in payroll also does not make it automatically tax-free.
Who Is Eligible for Ex Gratia Payments, and When Are They Paid?
There is no single eligibility rule for every ex gratia payment. Eligibility depends on the employer’s approved terms, the relevant settlement or the specific government scheme.
Common circumstances include:
| Circumstance | What an ex gratia payment may cover |
|---|
| Employee hardship | Additional financial assistance following an accident, medical emergency or disaster |
| Festival or special occasion | A discretionary goodwill payment for employees covered by the announcement |
| Restructuring or employee separation | Additional support above amounts already payable under applicable law and employment terms |
| Death of an employee | Financial assistance to the employee’s family or legal heirs |
| Customer or insurance dispute | A goodwill payment offered without admitting liability |
| Government relief | Assistance to people meeting the conditions of a notified scheme |
These circumstances are examples, not automatic eligibility categories.
For a company payment, employees should check the announcement or policy for the eligible group, joining-date cut-off, employment status, amount and payment date. Contract employees are covered only if the applicable terms include them.
For government assistance, the relevant notification determines who qualifies and which documents or verification steps are required.
An ex gratia payment also does not automatically recur each year. A previous payment alone should not be treated as a promise of future payments; the policy, agreements and surrounding facts matter.
How Is an Ex Gratia Payment Calculated?
Ex gratia payments have no universal calculation formula. An employer may approve a fixed amount or define a calculation using a specified salary base and period.
The following examples illustrate possible company decisions, not statutory entitlements.
1. A Fixed Amount
An employer approves ₹12,000 for each of 80 eligible employees.
Total ex gratia payout = ₹12,000 × 80 = ₹9,60,000
This method makes the amount the same for every employee covered by the decision.
2. A Percentage of a Defined Salary Base
An employer approves a payment equal to 10% of one month’s basic salary. An eligible employee has monthly basic pay of ₹30,000.
Ex gratia payment = ₹30,000 × 10% = ₹3,000
The approval must specify whether the percentage applies to one month’s basic pay, annual basic pay or another defined amount. Simply stating “10% ex gratia” leaves the calculation unclear.
3. A Multiple of Monthly Pay
During restructuring, an employer approves an additional payment equal to two months of a defined salary amount of ₹45,000.
Ex gratia payment = ₹45,000 × 2 = ₹90,000
The settlement should separately identify salary dues, statutory benefits and the additional payment. This prevents employees from mistaking the ex gratia amount for the entire settlement.
A calculation record should show the salary base, reference period, rate or multiple, eligibility conditions and approved gross amount.
Ex Gratia vs Bonus vs Gratuity: What is the Difference?
Ex gratia is generally discretionary, bonus may be statutory or contractual, and gratuity is a statutory service benefit for eligible employees.
| Basis | Ex gratia | Bonus | Gratuity |
|---|
| Main purpose | Goodwill, assistance or additional support | Reward or benefit under applicable law, employment terms or an incentive arrangement | Benefit linked to qualifying employment and service |
| Obligation to pay | Generally voluntary at the outset; agreed terms may create obligations | May be legally required, contractually promised or discretionary | Mandatory where the applicable conditions are met |
| Calculation | Amount or method approved for the payment | Depends on the applicable statutory or contractual framework | Determined by applicable statutory provisions |
| Typical payment occasion | Special circumstances, festivals or employee separation | Annual, periodic or performance-related payment | A qualifying exit or other event covered by law |
| Tax position | No automatic exemption merely because of the name | Generally taxable as employment income | Exemptions may apply subject to conditions |
A voluntary festival payment is sometimes called an “ex gratia bonus”. That description does not allow an employer to replace a statutory bonus obligation with a discretionary payment.
Similarly, an employee may receive both gratuity and ex gratia in the same settlement. The additional amount should not obscure gratuity or other dues payable separately.
Current legal context: India’s four labour codes were made effective from 21 November 2025. Bonus and gratuity comparisons should therefore account for the Code on Wages, 2019, the Code on Social Security, 2020, and applicable rules and transition arrangements, rather than relying only on the older Acts.
Are Ex Gratia Payments Taxable in India?
An ex gratia payment from an employer is generally taxable as salary or profits in lieu of salary unless a specific exemption applies. “Voluntary”, “goodwill” and “compensation” are not automatic tax exemptions.
For an employee receiving an additional ₹30,000, the relevant question is whether that payment qualifies for an exemption. If it does not, it generally enters the taxable employment-income calculation. Payments linked to termination also require assessment of their nature and any applicable exemption.
The Income Tax Department identifies specific situations, including:
- A lump-sum payment to the widow or other legal heirs of an employee who dies while in active service, covered by CBDT Circular No. 573.
- An ex gratia payment by the Central or State Government, a local authority or a public sector undertaking following qualifying injury or death while on duty, covered by CBDT Circular No. 776.
These are defined categories. They do not make every hardship payment, employee exit payment or government payment exempt.
Is TDS Deducted on Ex Gratia?
If the payment is taxable employment income, the employer should consider it when calculating applicable salary TDS. There is no single flat “ex gratia tax rate” for all recipients.
Employees should ask payroll for the gross amount, deductions and net payment, together with the basis of any exemption applied.
For current-year treatment: The Income-tax Act, 2025 came into force on 1 April 2026. Older articles may cite provisions of the Income-tax Act, 1961, so the relevant tax year and applicable law must be checked.
Tax relief may be available for certain qualifying receipts, including specified profits in lieu of salary. Under the 2025 Act, Section 157 provides for such relief subject to prescribed conditions. Receiving a large one-time payment does not automatically establish eligibility.
What Was the GOI Ex Gratia Scheme for Loans and Credit Cards?
The Government of India’s 2020 ex gratia loan scheme provided relief equal to the difference between compound interest and simple interest for a specified six-month period. It was a COVID-19 measure covering 1 March 2020 to 31 August 2020, not a recurring annual benefit.
Who Was Eligible Under the 2020 Scheme?
The historical scheme covered specified loan accounts subject to conditions, including:
- Aggregate sanctioned limits and outstanding amounts across lending institutions not exceeding ₹2 crore as on 29 February 2020.
- Accounts classified as standard, rather than non-performing, on that date.
- Eligibility regardless of whether the borrower fully, partly or never used the repayment moratorium.
Covered categories included MSME, education, housing, consumer durable, automobile and consumption loans, personal loans to professionals, and credit card dues.
What Did the Payment Actually Reduce?
The scheme addressed the specified difference between compound and simple interest. It did not cancel the principal or waive all interest.
For a simplified illustration, suppose the eligible interest calculation produced:
| Interest calculation | Illustrative amount |
|---|
| Compound interest for the relevant period | ₹18,600 |
| Simple interest for the relevant period | ₹18,000 |
| Difference | ₹600 |
The illustrative relief would be ₹600. Actual amounts depended on the scheme’s calculation rules and account details.
Lending institutions credited eligible borrower accounts. For credit cards, the adjustment related to the card account or statement, not a utility bill.
A bank-statement entry referring to this scheme should therefore be understood in its historical context. Any present-day relief claim requires a separate current notification; the 2020 announcement alone does not establish eligibility for a new loan.
How Should Employers Process Ex Gratia Payments?
A discretionary payment still needs a clear approval and payment record. HR and finance teams can use the following sequence:
- Record the purpose. Explain whether the payment is employee assistance, festival goodwill or additional separation support.
- Confirm the terms. Document eligible recipients, exclusions and the approved payment date.
- Validate the calculation. Specify the salary base, period and amount, and clarify whether the approval is for a gross or net payment.
- Review the treatment. Assess tax, statutory contributions and any contractual obligations before disbursement.
- Approve and communicate. Give recipients a clear breakdown showing how the additional payment relates to regular pay or settlement dues.
- Pay and reconcile. Use the appropriate payroll processing workflow to disburse approved amounts, confirm payment outcomes and retain records of deductions and exceptions.
Read more about payroll in HR to understand how employee information connects with payroll inputs. For the wider process, see this guide to payroll management systems.
Frequently Asked Questions
Is Ex Gratia Included in CTC?
A discretionary, unpromised payment should not be assumed to form part of guaranteed CTC. Check the offer letter and compensation breakdown. If an amount described as ex gratia is expressly promised, its contractual status requires closer examination.
Does Ex Gratia Attract PF or ESI Contributions?
There is no universal answer based only on the payment’s name. The applicable wage definition, reason for payment, employment terms and relevant contribution rules determine treatment. Payroll should assess these separately from income tax.
Does Accepting Ex Gratia Mean Giving Up Other Claims?
Not automatically. A settlement may include a release or waiver, but that depends on its wording and applicable law. Employees should read those terms and check how statutory dues are identified before accepting the settlement.
What Should an Employee Do If an Announced Payment Is Missing?
Ask HR or payroll for the eligibility conditions, approval status and scheduled payment date. If the payment was promised in an agreement or policy, retain that document along with relevant correspondence and payslips.
Can an Ex Gratia Payment Be Made Outside Monthly Payroll?
Yes, an employer may process a separate off-cycle payment or include it in an exit settlement. A separate bank transfer does not remove applicable reporting, tax or record-keeping requirements.
