Seeking Clarification on Tax Implications for Ex-Gratia Payment Received After layoff

[Karan]

Hi,
I was laid off from my job and was paid 4 months salary as ex gratia subsection under the salary section in my Form 16. I was a manager in my last role and the ex-gratia amount is 17 lacs and was taxed by this employer in its entirety(not 12.5 lacs u/s 10b or 10c). This is adding substantial tax this AY, esp in year that’s been so turbulent. Can someone please help if there’s any deduction allowed? I see conflicting reads on the internet about ex-gratia taxability, with some saying its not taxable at all and some saying everything is taxable.

[YAGAY andSUN]

Your summary is accurate and aligned with the settled legal position.

To reiterate concisely: Ex-gratia on termination is fully taxable under Section 17(3) unless it qualifies under Section 10(10B) (retrenchment) or Section 10(10C) (VRS), both of which have strict applicability conditions. Since you were a managerial employee and the payout wasnt under a notified VRS, neither exemption applies, making the ?17 lakh fully taxable.

The only practical relief available is under Section 89(1) for income received in advance or in lump sum, which helps spread the tax impact over previous years. To claim it, Form 10E must be filed before filing your ITR. This is the best available course of action in your case to mitigate the tax impact.

[Harshaditya Kabra]

Unfortunately, your ex-gratia payment of Rs. 17 lakhs is fully taxable as salary income under Section 17(3) of the Income Tax Act, 1961. This is because ex-gratia payments made by employers to employees in connection with termination of employment are treated as "profits in lieu of salary" and are subject to regular income tax rates

[Karan]

My ex-employer hasn't given relief under Section 89(1) in Form 16. How much relief can I get under this section?

Can this be brought under the purview of 10(B) in any way?

[Guruprasad]

I’m in a similar situation, though my designation is not that of a manager and currently unemployed. Based on a few tribunal verdicts  reviewed, the rulings were in favor of the employee, indicating that ex-gratia payments may qualify as exempt. Can this be claimed and later challenged if questioned by the Authorities. Please advise. 

AI Summary

Ex-gratia payments on termination are taxable as profits-in-lieu of salary; Section 89 relief can mitigate lump-sum tax impact. Ex-gratia payments on termination are taxable as profits in lieu of salary unless they meet strict retrenchment or notified VRS exemption conditions. Where treated as salary, relief for lump-sum or advance receipts permits spreading tax impact across years; the taxpayer must follow the prescribed procedure and file the required relief claim form before filing the income-tax return to seek that mitigation.