Ex Gratia Payment

What is Ex Gratia Payment?

Ex-gratia is a Latin word which means “by favor”, any payment made voluntarily to the person who suffers from any casualty, accident, or any contingency which has caused financial and non-financial loss to the accused person normally by the Government, an organization, social institutions or non-government organizations.

Explanation

These payments are by nature voluntary payer is not legally obliged to make such payments. The payer is making payment as gratitude towards a person’s loss and suffering. Ex- gratia payments are also referred to as ‘golden handshakes’ or ‘golden boots. It is a settlement package where there is no legal liability but moral obligation out of which payment is made to avoid further legal matters in the court of law. It is often termed as a gesture of goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more for something bad that had happened with you or your loved ones.

Ex-Gratia-Payment

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Examples

  1. Company planning for layoffs will pay ex gratia payment to affected employees over and above statutory payments, which are legally due.
  2. E.g., Severance pays in some cases if paid voluntarily, or ESOPsESOPsEmployee stock option plan (ESOP) is an “option” granted to the company employee which carries the right, but not the obligation, to buy a promised number of shares at a pre-determined price (known as exercise price). read more (Employee stock option plans) given to resigned employees voluntarily.
  3. Malaysia Airlines had given ex- gratia payments to the families of each passenger aboard missing in the flight accident.
  4. The Prime minister of Malaysia announced ex- gratia payments to the judges affected by the 1988 Malaysian constitutional crises.
  5. US department of defense announced this payment to the families of each non-US personnel killed in the friendly fire accident in the 1994 Black Hawk shootdown incident.
  6. PM of India announced this payment to families of CRPF personnel killed in the Pulwama terrorist attack in J&K state. Recently in India, the coal minister raises ex- gratia for fatal mine accidents by three times.
  7. An insurance company may make an ex gratia payment to its policyholders when the claim is not tenable. However, the company chooses to make such voluntary payment as a matter to have friendly relationships with stakeholders and maintain good customer rapport.
  8. USS Vincennes fired upon Iran Air Flight and killed hundreds of individuals; the US government announced this payment to the families of victims.

Calculation of Ex Gratia Payment

It is voluntary in nature; there is no separate method to calculate such payments. These payments are given on the wish of the giver and the availability of funds with the giver. Any person gives these unless those are outside the scope of the employer-employee relationship. Its lumpsum amount paid. There is no limit on this payment as it is voluntary in nature. Its more wish based, based on gratitude. However, some of the other contributions paid by employers like a bonus, provident fund, and gratuity are limit bound.

Ex Gratia Payment vs. Bonus

A bonus is a statutory expense, whereas, in ex gratia, there is no liability to pay. The minimum bonus rate is 8.33%, and the maximum goes up to 20%. No such limits in ex gratia as it is lumpsum payment. Ex-gratia is usually paid to employees who are not covered by the bonus. Payment of bonuses is a liability and cannot be avoided.

On the other hand, ex gratia payment can be avoided as it is not compulsory. Ex gratia is a moral obligation, whereas a bonus is a legal obligation. Bonus payments are performance-linked. On the other hand, ex- gratia payments are not performance linked. Payment of bonus is performance-linked; hence need not be given to all employees; however, if the employer announces ex gratia payment, then it should be paid to all employees irrespective of performance pay and any other factor what so ever. This payment cannot be in lieu of a bonus; it is in addition to the bonus.

Taxability

The taxability of such payments differs from country to country. There is a tax breakTax BreakA tax break is a tax benefit or tax concession allowed by the government to encourage businesses to increase their investments, ultimately boosting the economy. It comes in a variety of ways, such as claiming tax deductions or excluding profits from tax returns.read more for such non-contractual payments up to a certain amount. The employer pays you ex gratia, at the time of tax filing, the employee must select an appropriate box to avoid taxAvoid TaxTax avoidance is the process of reducing the income tax liability of an individual or firm by adopting the lawful methods. The taxpayers can claim exemptions and deductions as allowed under the nation's tax provisions. Such as investments in municipal bonds and deductions for business loss.read more on such income. The threshold limit in Britain is around Euro 30,000. April 2020 onwards, an employer will be required to pay NIC on any part of termination payment above Euro 30,000. The employer may pass on such a burden of tax to employees by reducing their payment. The employee, in turn, may go to the employment tribunal and may get Euro 30,000 compensation but will be subject to tax. These payments made above Euro 30,000 must be reported to HM Revenue and customs.

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