Income Tax on Exgratia Payment

[M C Rawat]

We are an Industry Association registered under M P Societies Registration Act and Recognised by the Income Tax Deptt as a Charitable Institution.. We are having five employees only, who are mostly retired reemployed persons.

They are paid salaries which are too low and are outside taxable limits. However, each year on the eve of Deepawali these employees are paid two months salary as exgratia..

We would like to know whether this payment is to be treated as salary income and taxable in the hand of the employees?

[DR.MARIAPPAN GOVINDARAJAN]

Yes, this is taxable in the hands of the employees.

AI Summary

Taxability of ex gratia payments: ex gratia paid to employees in lieu of salary is taxable as salary income.
Recurring, employment linked festive payments characterized as ex gratia and paid to employees in the course of service are treated as emoluments and fall within the scope of taxable salary income rather than qualifying as non taxable voluntary gifts.