Seeking Clarification on Tax Implications for Ex-Gratia Payment Received After Job Termination in Pune, India

Hello,

I recently lost my job and received a payment of 4 months' salary as ex-gratia, which is listed under the salary section in my Form 16. In my last role, I was a manager and the ex-gratia amount is 17 lacs. This amount was taxed in its entirety by my employer, not considering the 12.5 lacs under section 10b or 10c. This situation is adding a substantial amount to my tax this assessment year, especially in a year that's been so turbulent. Can someone please help me understand if there's any deduction allowed? I've come across conflicting information on the internet about the taxability of ex-gratia, with some sources saying it's not taxable at all and others stating that it's fully taxable.

The taxation of ex-gratia payments in India can be a complex issue, as it often depends on the specific circumstances of the payment.

As per the Income Tax Act, 1961, any amount received by an employee from his/her employer at the time of termination is taxable under the head 'Income from Salary'. However, there are certain exemptions available under section 10(10B) and 10(10C) of the Act.

Section 10(10B) provides an exemption for any compensation received at the time of termination of service. The exemption is the least of the following:
1. An amount calculated as per the provisions of the Industrial Disputes Act, 1947 or any other Act;
2. Actual amount received;
3. ₹5,00,000.

Section 10(10C) provides an exemption for any compensation received at the time of voluntary retirement or termination of service. This exemption is available up to a limit of ₹5,00,000 and can be claimed only once in a lifetime.

In your case, if the ex-gratia payment of 17 lacs was taxed in its entirety, it appears that these exemptions were not considered. It would be advisable to consult with a tax consultant or chartered accountant who can review your specific situation and provide accurate advice.

Remember, it's crucial to have all your documents in order, including your Form 16, to ensure a smooth process. If you find that you are eligible for exemptions, you may need to file a revised return to claim these benefits.

Please note that this advice is based on the current tax laws in India and may change if the laws are amended. Always consult with a tax professional to ensure you have the most up-to-date information.

Ex gratia payments are generally taxable in India, but the tax treatment depends on the circumstances and purpose of the payment. Since your employer has taxed the entire amount of ₹17 lakhs under the salary section in your Form 16, let's explore possible deductions.

Taxability of Ex Gratia Payments:

- Ex gratia payments are considered taxable income, specifically "income from other sources," and are subject to income tax.
- If the payment is made as compensation for loss of office or employment, it may be subject to income tax.

Possible Deductions:

- Section 10B or 10C: Although your employer didn't claim exemption under these sections, you may want to consult a tax professional to verify if this applies to your situation. Typically, these sections relate to specific schemes like Voluntary Retirement Scheme (VRS) or Separation Scheme.
- Tax Relief on ₹30,000: There's no direct relief of ₹30,000 mentioned in Indian tax laws for ex gratia payments, unlike in the UK. However, you can explore standard deductions available under the Indian Income Tax Act.

Next Steps:

- Consult a tax professional to review your Form 16 and assess potential tax savings opportunities.
- If you believe the ex gratia payment was incorrectly taxed, you can claim a refund of the TDS deducted by your employer in your return of income.
- Ensure the amount of ex gratia received is disclosed in the return as exempt income, if applicable, and also make a note in the schedule for TDS ¹.

It's essential to understand the specific tax laws and regulations applicable to your situation. A tax consultant can provide personalized guidance to minimize tax liability and ensure compliance ².