EX-GRATIA PAYMENT RECEIED FROM EMPLOYER FOR SAPERATION AGREMENT (FOR LEAVING A JOB)

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A client received a substantial ex-gratia payment as part of a separation agreement upon leaving their job. While the employer deducted tax on the full amount, including the ex-gratia portion, the client is seeking clarification on whether this payment is tax-exempt under specific provisions. The discussion highlights the potential for scrutiny by the IT Department due to the full amount appearing in Form 26-AS and notes that such payments are generally taxable as 'profit in lieu of salary' unless proven otherwise.

Dipak Gulhane

Dipak Gulhane (Querist)
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11 June 2024 My client received EX-GRATIA PAYMENT FROM EMPLOYER as part of Separation Agreement of RS.38,00,000 for discontinuing/termination of employment. He can join any other job after separation. In from 16 Employer deducted Tax on all salary including ex-gration payment. In salary Slip for that month its shown as "Ex-gratia" without mentioning whether its exempt or not. As I googled about ex-gratia taxability, its showing as exempt from tax but I was not able to find specific tax provision & section for this. But as in 26-AS salary is shown in full hence as per my analysis Its very probable that ITR may be scrutinized by IT Department. Shall I take this as exempt in a salary & if yes then under which section.