Ex gratia Payment
Last updated: 13 July 2026. General explainer, not legal or tax advice.
At a glance
Where ex gratia fits
An ex gratia payment is money an employer gives voluntarily, with no legal duty behind it. The most common case is an employee who earns above the statutory bonus ceiling. The Payment of Bonus Act does not compel a bonus for them, so an employer that still wants to reward them pays an ex gratia amount. It can also appear as goodwill at a festival or a one off event.
Bonus versus ex gratia
The line matters. Statutory bonus is a legal minimum for eligible employees and is governed by the Act. Ex gratia is discretionary and rests on the employer's own policy. Calling a payment ex gratia signals that it is a choice, not an entitlement the employee can demand next year.
Tax on ex gratia
An ex gratia payment made to an employee is generally taxable as part of salary income, and TDS applies to it. Certain payments made on retrenchment or under a voluntary retirement scheme have their own tax treatment, but an ordinary festival or performance ex gratia is taxed as salary.
Using ex gratia well
Because ex gratia is discretionary, a short written line on how and when it is paid keeps it from hardening into an assumed right. That clarity protects the employer while still letting it reward staff who sit outside the bonus rules.
Ex gratia on retrenchment or exit
Not all ex gratia is a festival gesture. An employer sometimes pays an ex gratia amount when a role is closed or under a separation arrangement, and this kind of payment can have a different tax treatment from an ordinary reward. Retrenchment compensation and payments under a voluntary retirement scheme, in particular, have their own rules.
Because the treatment depends on the reason and the structure, an ex gratia tied to an exit is worth a quick check with the company's accountant before it is paid, rather than assuming it is taxed exactly like a festival payment.
Worked example
A senior employee earns above the 21,000 rupee monthly bonus ceiling, so the Payment of Bonus Act does not require a bonus. The company still wants to recognise the year, so it pays an ex gratia amount at Diwali, which is taxed as part of the employee's salary.
Related terms
Frequently asked questions
What is an ex gratia payment?
A payment an employer makes voluntarily, with no legal obligation behind it. It often goes to staff who fall outside the statutory bonus rules, or as a goodwill gesture.
Is ex gratia the same as bonus?
No. Statutory bonus is a legal minimum for eligible employees. Ex gratia is discretionary and rests on the employer's own policy.
Is ex gratia taxable?
Yes. An ex gratia payment to an employee is generally taxable as part of salary income, and TDS applies.
Who usually receives ex gratia?
Often employees who earn above the statutory bonus ceiling, or staff being recognised at a festival or for a one off reason.
Is ex gratia a right?
No. It is discretionary. A clear policy line helps keep it from being read as an entitlement.
Is ex gratia on exit taxed like a festival bonus?
Not always. Ex gratia tied to retrenchment or a voluntary retirement scheme can have its own tax treatment, so it is worth checking before paying.
Why check ex gratia with an accountant?
Because the tax treatment depends on the reason and structure of the payment, which differs between an ordinary reward and an exit related amount.
Sources and official references
The rules and figures on this page trace to the official sources below. Statutory amounts and dates change, so confirm the current number on the source before you act on it.
How Offrd helps
Offrd records every pay component, statutory or discretionary, on the payslip, so nothing sits off the books.