Legalities of Ex-gratia Payments

Ex-gratia means a payment made by an employer/management "gratis" that is of one’s own discretion and under no obligation of any law. Ex-gratia is not part of the salary rather it is a form of incentive. It is given by the management to a worker/employee either as gratitude for his/her extra work, or of free will when the company is making profits.

Generally, there exist no limits with regards to such payments unless there is a Memorandum of Understanding (MOU) between the employer and the employee to this effect.

Such ex-gratia payments do not fall under the purview of the Employee’s Provident Fund Act, 1952. Also, as per Section 2(22) of the Employees’ State Insurance, 1948 (the Act), such payment are not considered as wages for purpose of contribution under the Act, unless paid within an interval of two months.