Ex gratia payments are discretionary and lack legal obligations, typically extended by employers to assist employees in financial crises, resolve legal disputes, or address employment contract matters. These voluntary payments are also commonly utilized to alleviate losses caused by major disasters, such as COVID or earthquakes, as part of humanitarian aid.

Contrastingly, bonuses or appraisals are distinct from ex gratia payments. Bonuses acknowledge employee performance and KPI achievements during reviews, whereas ex gratia payments are not standardized, occurring selectively on special occasions based on specific needs and without a predetermined frequency.

When employees face financial challenges, they can discuss ex gratia assistance with their employer or HR professional. The application process varies among organizations, so employees should refer to their HR Handbook or consult HR for details.

Commonly followed steps include:

- Face-to-face discussion : Initiate a one-to-one conversation with the relevant person, ideally during induction programs to inform employees about ex gratia provisions.

- Documentation : Submit required documents as evidence after the discussion. HR professionals should guide employees through the documentation process for timely clearance.

- Agreement : Once documentation is complete, a formal agreement specifying ex gratia details, purpose, terms, and conditions is drafted. Employees should carefully read and address doubts before e-signing.

- Payment : After acknowledgment, ex gratia payment is processed into the employee's account according to agreed terms. The amount may be paid in installments or as a lump sum based on negotiation and terms.

- Ex gratia payments are voluntary and not legally obligatory.

- They are commonly offered as a goodwill gesture or to compensate for losses or hardships.

- In India, ex gratia payments are tax-free unless they serve as a substitute for salary or wages.

- The payment amount, not subject to a specific cap, is typically based on the needs and circumstances of the individual or group.

Ex gratia payments are permissible in various situations, such as:

1. Layoffs or terminations

2. Injuries or deaths on the job

3. Natural disasters or other calamities

4. Relocations

Examples of ex gratia payments in India include:

1. In 2020, the Indian government provided a ₹10 lakh (US$12,500) ex gratia payment to the families of COVID-19 pandemic victims.

2. In 2019, a government downsizing program led to a ₹2 lakh (US$2,500) ex gratia payment for each laid-off employee.

3. In 2018, the Indian government announced a ₹5 lakh (US$6,250) ex gratia payment for employees injured on the job.

The taxability of ex gratia payments, being non-legally binding and voluntary, varies based on situations:

Taxability Rules for Employer : Organizations often treat ex gratia payments as business expenses, legal settlements, or employee benefits in financial reports, seeking deductible expenses for taxation purposes.

Taxability Rules for Employee:

1. Termination : If ex gratia is part of the Full and Final settlement and falls within the tax slab of the Income Tax Act of India, it may be taxable up to a certain limit.

2. Compensation : Legal dispute settlements involving ex gratia compensation are generally taxable in most cases.

3. Gift or Favor : Ex gratia payments offered by employers as humanitarian aid are usually completely tax-free.

In India, ex gratia payment rules fall under the purview of the Income Tax Department. Key regulations include:

1. Severance Payments :  According to Sec 10(10C) of the Income Tax Act, payments to employees as compensation for employment termination qualify for exemption, up to a specified limit.

2. Legal Settlements : Ex gratia payments related to legal dispute settlements may be subject to taxation based on the nature of the settlement.

It's important to note that rules for ex gratia payments in India might undergo changes through amendments proposed in the financial budget. Staying updated with the latest regulations is essential when filing for ex gratia payments.