Ex gratia compensation payments are made to provide relief to individuals for damages or claims. Such ex gratia made to employees by the management or employer is known as "gratis payment". Ex gratia payment is not obligatory under the law and is at the employer’s discretion. Also, such payments are normally encouraged to compensate tenured employees seeking early retirement since the organisation can effectively balance and reduce its running operational costs.
Hence, there are no limits on the ex gratia amount, it is completely the employer’s choice. Its limits depend on whether there is a memorandum of understanding or MOU between the employee and employer.
Did you know?
Ex-gratia in Latin means a payment made “by favour.”
Features of Ex gratia scheme
- Ex gratia scheme payments are made by the government, employing company or organisation, or an insurer making payments as claims or damages suffered.
- The paying party has no liability to the payment receiver when paying ex gratia payments.
- There is no statutory obligation or mandate to compensate the individual with Ex-gratia payments.
- They follow either the memorandum of understanding between the employee and employer or the employer’s choice and are considered ‘gratis’ payments.
Differences between mandated and voluntary payments
Legally mandated payments and payments with an ex gratia are completely different. Payments made under a legal mandate are statutory payments rather than voluntary payments like ex gratia.
For example, in the case of insurance claims, whenever a policyholder is covered under an insurance policy that includes a cover for injury sustained or death in an accident, the insurer is legally obligated to honour the claim amount covered therein. This is not a voluntary payment and is one under statutory obligation, where an admission of liability is present.
In the case of ex gratia payment offered by the governments, insurers, employers etc., they are generally offered when there is an obligation. For example, ex gratia payment means the victim compensates those who die accidentally when the police open fire to subdue mobs.
The government recently announced one such ex gratia payment due to the losses and inability to pay interest on outstanding loans due to the COVID-19 pandemic. Employers generally offer their employees an ex gratia in-lieu of voluntary retirement after several years of service to encourage the employee's early retirement. This gesture of goodwill to an employee is also used strategically to reduce operational running costs.
Relief under Ex-gratia Scheme
- The Indian government recently announced the Ex-gratia Payment Scheme providing tax relief to individuals and employees receiving COVID-19 related payments from voluntary organisations or employers.
- Certain concessions on the ex gratia payments paid to the families of those who succumbed to the lethal virus were also offered.
- Under the CBDT (Central Board of Direct Taxes) scheme for ex-gratia payments, the exemption on taxes is without any financial limits in the case of amounts for COVID treatment received from the employer. It is limited to ₹10 Lakh received in cases where other persons have offered such ex gratia payments.
- The tax benefit is available for COVID-related treatment funds received only for the fiscal year of 2019-2020 and subsequent years.
Many people were unable to repay their loans. This led to private and bank loans charging compound interest charges on outstanding payments. Consequently, the government scheme (announced on October 23rd 2020) was announced to provide ex-gratia payment relief to eligible borrowers by crediting the difference in interest. The ex gratia payment offered is the difference between the two rates of the compound and simple interest charged between the six months between March and August 2020.
Example: Specified accounts that charged compound interest between Mar 1st and Aug 31st 2020 will be charged simple interest and the difference amount credited by the government.
Hence, the ex-gratia payment scheme meant to provide relief in such cases has the one-time ex-gratia amount calculated as the difference between the simple and compound interest rates charged on the ongoing loans. This amount is either credited to the customer’s bank accounts where they availed the loan or in the form of a one-time credit to their ongoing outstanding loans principal amount and is directed to reduce their loan liability.
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Effects of the Ex-gratia scheme
The pandemic, lockdowns and the resultant economic chaos caused a lot of suffering and difficulties to the families of those who died or had to take medications or were hospitalized. Several taxpayers and tax professionals petitioned the government for relief as COVID-19 treatment became expensive for most people. Many were unable to make loan repayments and had to resort to private borrowings to deal with the crisis.
The ex gratia scheme was timely, well-received and provided some relief in the form of tax exemptions. Financial consultancies and firms like Price Waterhouse, AKM Global, Fullerton, etc., welcomed the move and sought several clarifications to help people deal with the ambiguous areas of the tax exemption.
- Employers, in particular, were a relieved lot as the scheme clarified the taxation norms for ex-gratia payments. In the absence of such clarifications, the employer was mandated to withhold taxes on ex-gratia payments because ex-gratia meaning in salary income includes the reimbursed amounts for COVID-19 treatment, ex gratia payments to the deceased employee’s families, employer loans for COVID treatment, etc., which get considered as taxable income in the hand of the employee.
- The clarifications issued also clarify that COVID treatment at home and hospitalisation are both eligible for relief. Moreover, amounts reimbursed to the afflicted by any person and the employer is tax-exempt.
- Additionally, the CBDT extended the compliance deadlines for several filing requirements. This includes the mandatory linking of Aadhar and PAN details for income tax filing, which was extended to 30th September from the earlier date of 30th June. This is currently extended to Mar 31st 2022.
- Those who benefitted also included the taxpayers with capital gains from selling houses or residential property. They must invest the capital gains in purchasing specified instruments or other residential property to avoid being taxed. Their deadline was also extended to the 30th of September.
- The last date under the dispute resolution ‘Vivad se Vishwas’ Scheme was also extended from 30th June to 31st August 2021. The amounts also due under the scheme are payable up to the 31st of October 2021.
Ex-gratia Payment Scheme waiver criteria
The essential waiver criteria under this scheme for ongoing loans and ex gratia payments are
- The loan account should be a “Standard” account listed under banking regulations as of the 29th of February 2020.
- The loan amount outstanding should not be greater than ₹2 Crore.
- These two conditions also effectively imply that those loans termed as non-performing assets or reported as such before or on the 29th of February 2020 will not be eligible to claim the waiver of interest.
What loans are eligible for the tax waiver?
As per the scheme guidelines, this waiver applies to all organisations offering the following loans -
- Personal Loans given to independent professionals like chartered accounts, lawyers etc.
- Home Loans
- Two Wheeler Loans
- Commercial Vehicle Loans
- MSME Loans
- Loans against Property
COVID-19 relief measures
The Finance minister Smt Nirmala Sitharaman extended the date for linking the PAN and Aadhar details required to file Income Tax and announced an interest waiver for specified accounts incurring compound interest instead of simple interest between Mar 1st and Aug 31st 2021, which is set to benefit many individual taxpayers and families who received COVID-19 treatment-related aid and employer’s financial help. This ensures that the income tax liability on such treatment that is automatically considered is treated as an ex gratia payment and does not burden the taxpayer.
Facts about COVID-19 ex-gratia scheme
- That ex gratia payments received from employers is tax-free from FY 2019 to 2020 and subsequently.
- The tax limit applies to all loans with a limit of ₹10 Lakh when such borrowings or loans are made from private persons other than the employer. There is no limit for the ex gratia payments made by the employer, and the limit for outstanding bank loans is set not to exceed ₹2 Crore.
- The deadline for repayments under the Vivad Se Vishwas Scheme was extended to the 31st of August.
- The reinvestment of capital gains from the transfer or sale of residential and house properties is extended to 30th September.
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Conclusion
Important among the tax on ex gratia payments doubts were whether the post-COVID complications, like other complications of COVID like the black fungus etc., were covered under the one-time waiver? For 2019-20, during COVID-19, the government issued guidelines and filing instructions for those who paid taxes on ex gratia payments. It also includes reimbursements during FY 2019-20 since the last date for filing and revision of returns was over.
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