Ex gratia I got at the time of layoff was taxed. Can I get refund?

I was laid off from an MNC by way of resignation. The company offered ₹35 lakh as ex gratia, but taxed the entire amount as per the applicable tax slab rates. Is the ex gratia taxable? If yes, why? Can I get a refund/rebate on the tax paid?

The taxability of the ex gratia received by you from your former employer would depend on the exact nature of the payment and the circumstances under which such payment is made. It would be taxable as salary if it was paid to you in connection with your services rendered during employment or in connection with the termination of your employment. 

If the ex gratia is paid voluntarily by the employer, say in appreciation of any personal qualities of the employee, such payment would not be taxable as salary. While various courts have held that such voluntary payment of ex gratia without any legal obligation and not in lieu of services rendered by the employee would be considered as a capital receipt and, therefore, not taxable, most of these decisions were before the introduction of section 56(2)(x). In my view, if such ex gratia is received voluntarily from a former employer, such amount would likely be taxable as income from other sources under section 56(2)(x) as it is received without any consideration. 

If you wish to claim that the amount received is not taxable, you can claim a refund of the TDS deducted by your employer in your return of income. You would need to ensure that the amount of ex gratia received by you has been disclosed in the return as exempt income, and such a disclosure is also made in the schedule for TDS. However, as discussed above, such a view is unlikely to succeed as it may be taxable as income from other sources.  

It is assumed that the entire amount of ex gratia received by you is voluntary and is not towards gratuity or under any voluntary retirement scheme as the taxability under each of these is different and may be exempt, subject to certain conditions as well as a threshold. 

Mahesh Nayak, chartered accountant, CNK & Associates.

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