Ex Gratia Exemption in Income Tax Section

This thing called ‘Ex Gratia’ is used frequently in cases of compensation, like for layoffs, voluntary retirement, or tragic events such as death or natural disasters. Although the term sounds legal & obscure, it simply means a payment made “out of goodness” — a voluntary payment, not one legally mandated.

But the key question is — Is Ex Gratia taxable under the Income Tax Act?
The response depends on who receives the payment & why it is made. These payments are recognized under multiple sections, such as Section 10(10C) (voluntary retirement), Section 10(10BC) (natural calamities), and CBDT notifications.

What is an Ex Gratia Payment?

The phrase derives from Latin, meaning “as a favor” or “out of kindness.”
An Ex Gratia payment is made voluntarily, not under any legal obligation.

Examples include:

• Payment by a company to an employee at the time of retrenchment.
• Amount of relief provided by government to victims of natural disasters or pandemics.
• Lump-sum payments to family pension holders on an employee’s demise or retirement.

It is a one-time compensation made as a matter of goodwill or humanitarian relief, rather than a legal obligation.

Also Read: Tax-Free Life Insurance Benefits

Tax Implications of Paying Ex Gratia

The taxability of ex gratia depends on its nature & purpose. The Income Tax Department treats each case individually.

Ex Gratia on VRS – Voluntary Retirement Scheme

Some companies or governments offer Voluntary Retirement Schemes (VRS), where employees receive Ex Gratia compensation.

Under Section 10(10C), such Ex Gratia payments are not taxable up to ₹5,00,000, provided conditions are met:

• Employee retires under a sanctioned VRS/separation scheme.
• Employee has worked at least 10 years or is over 40 years old.
• The benefit is availed only once.
• Applies to both government & non-government employees.

Example:
Mr. Sharma opts for VRS and receives ₹8,00,000 as Ex Gratia.
Out of this, ₹5,00,000 is exempt under Section 10(10C), and ₹3,00,000 is taxable as salary."

Ex Gratia to Family Pensioners – Full Exemption

Ex Gratia payable to family pensioners, given by the government or organizations on humanitarian grounds, is not taxable.

Under Section 10(10D) & CBDT Circular No. 573, such payments are fully exempt.

Example:
A retired government employee’s spouse receives ₹2,00,000 as Ex Gratia upon the employee’s death.
As per the CBDT Circular, this is not taxable, since it’s purely humanitarian.

Also Read: The Retirement Payout Exemption You Can’t Afford to Ignore

️ Ex Gratia Relief on Natural Calamities & Disasters

Governments often grant Ex Gratia compensation during disasters like earthquakes, floods, or pandemics.

Under Section 10(10BC), payments made:

• By the Central or State Government, or
• Out of a local authority or authorised fund,
  for loss of life or property due to natural disasters, are fully exempt from tax.

Example:
If a family receives ₹4,00,000 as Ex Gratia for flood damage, the amount is tax-free under Section 10(10BC).

COVID-19 Relief – CBDT Notification 92/2022

Ex Gratia related to COVID-19 receives special exemption.

As per CBDT Notification No. 92/2022:

• Full exemption for ex gratia paid by employer on death due to COVID-19.
• Exemption up to ₹10 lakh for ex gratia received from others.
• Applicable retrospectively from FY 2019–20.

If you received COVID-related Ex Gratia in India, it’s tax-free as per this notification.

Ex Gratia Paid to Retrenchees or Laid-Off Employees

Under Section 10(10B), compensation (including Ex Gratia) paid to retrenched employees is exempt up to ₹5 lakh.
The balance, if any, is taxable as Income from Salary.

This protects industrial workers from being taxed on genuine hardship payments.

Also Read: Time Limit for Completion of Assessments, Reassessments, and Recomputation

Ex Gratia Payment Made Without Specific Purpose – Taxable

Not all Ex Gratia payments are exempt.
Voluntary goodwill payments made by employers, not linked to retirement, retrenchment, or death, are taxable under Section 15 as salary.

In summary — Ex Gratia during employment is likely taxable, but those after separation or compensation may qualify for exemption.

CBDT Clarifications and Case Laws

Important CBDT Circulars:

• Circular No. 573 (1990) – Ex Gratia to family pensioners exempt.
• Circular No. 776 (1999) – VRS payments not deductible beyond ₹5 lakh.
• Notification 92/2022 – COVID-19 ex gratia exemption up to ₹10 lakh.

Key Judicial Precedents:

• CIT vs. M.P. State Agro Industries Corp. Ltd. – Genuine Ex Gratia on retirement not taxable.
• (2000) 71 TTJ 72 (Jaipur) – Confirmed VRS Ex Gratia exemption up to ₹5 lakh.

Comparison – Tax Treatment for Ex Gratia Payments

Also Read: Tax Haven Transactions Under Scrutiny

Practical Examples

• Example 1: Employer pays ₹3 lakh ex gratia to family of deceased employee (COVID-19). → Fully Exempt under Notification 92/2022.
• Example 2: PSU employee receives ₹6 lakh under VRS. → ₹5 lakh Exempt, ₹1 lakh Taxable.
• Example 3: Employee gets ₹2 lakh goodwill ex gratia for performance. → Fully Taxable as salary.

Key Takeaways

• Ex Gratia is a voluntary payment made without legal obligation.
• Certain Ex Gratia categories (VRS, calamities, COVID relief) are tax-free.
• Family pensioners receive full exemption.
• Maintain all records (notifications, circulars, employer letters) for ITR proof.
• Use Callmyca.com to verify eligibility & maximize exemptions.

❓ Frequently Asked Questions (FAQs)

Q1. What is Ex Gratia under Income Tax?
A voluntary payment not legally required, exempt under various sections depending on its type.

Q2. Is Ex Gratia taxable?
Depends on context — VRS, death, & disaster relief are not taxable; goodwill payments are.

Q3. Which section covers Ex Gratia for VRS?
Section 10(10C) exempts approved VRS ex gratia up to ₹5 lakh."

Q4. Is Ex Gratia to Family Pensioners taxable?
No, fully exempt under CBDT Circular 573.

Q5. What documents are required for exemption?
Proof of payment, employer certificate, notification copy, & ITR computation.

Also Read: The Essential Guide for NGO Registration and Tax Exemption

Conclusion

Ex Gratia exemptions ensure compassionate or voluntary payments in cases of retirement, retrenchment, or distress don’t face undue taxation.
If you’ve received an Ex Gratia payment & are unsure about its taxability, consult professionals.

👉 Visit Callmyca.com — where experts will guide you to choose the correct exemption, file ITR easily, and maximize your refund.