Delhi Red Fort Blast: Are Ex Gratia Payments To Victims Exempt From Tax? Here’s What Rules Say

Red Fort Delhi Blast: A powerful explosion near Delhi’s Red Fort on Monday evening left several people dead and many injured. In response, the Delhi government has stepped in to support the victims and their families. The blast, triggered by a high-intensity explosion in a car parked near Gate No. 1 of the Red Fort Metro station, sent shockwaves across the area. Chief Minister Rekha Gupta announced an ex-gratia payment for those affected as a financial relief. Families of the deceased will receive Rs 10 lakh as compensation, while Rs 5 lakh will be provided to those left permanently disabled. Victims with serious injuries will be granted Rs 2 lakh. The government has also pledged to cover all medical expenses for the injured, ensuring they receive the best possible care. An ex gratia payment is a voluntary financial relief offered by the government or an organisation as a humane gesture. But Is Ex Gratia Amount Taxable? Prashant Thacker, Partner at Thacker & Associates explains to News18.com that the taxability of ex gratia compensation depends on the nature and context of the payment under the Income-tax Act, 1961 (IT Act). In the context of non-employees, he adds, where ex gratia payments made as relief for death, injury, or natural calamities, the amount is generally treated as a capital receipt and not taxable, “since it does not constitute income”. Thacker says ex gratia compensation paid to non-employees or their families on account of death or injury is generally not taxable, as such payments are made purely on compassionate or humanitarian grounds and represent a capital receipt rather than income. “Since the payment is not in consideration of any services rendered or business relationship, it does not fall under any specific head of taxable income,” he adds. But in general context of employees, where ex gratia received by an employee during service, such as a performance-linked or discretionary bonus, is fully taxable as salary income under Section 17(1) of the IT Act. However, ex gratia received at the time of retirement or termination may be exempt, partially exempt, or fully taxable depending on the circumstances. Thacker points out that if paid in lieu of retrenchment, it is exempt under Section 10(10B), and if paid on voluntary retirement, it is exempt under section 10(10C), subject to the conditions prescribed therein. “Further, where the payment is made purely as a gesture of goodwill or compassion, without any contractual obligation, it may be regarded as a capital receipt and not taxable, provided it is not compensation for loss of employment or arrears of salary,” he adds.