HDFC Bank’s Rs 1,500-crore ex-Gratia payout sounds generous — but there's catch in terms of taxes

In the previous financial year, HDFC Bank disbursed more than Rs 1,500 crore as ex-gratia to its employees—one of the largest one-time payouts made by any Indian private bank. Announced soon after the HDFC Ltd–HDFC Bank merger, the payment was positioned as a gesture of gratitude for staff who helped navigate the complex consolidation process. But while the announcement earned appreciation across the corporate world, employees soon realised that this “thank you” came with a catch: the payout is fully taxable.

This has sparked a renewed conversation on what ex-gratia really means, and why companies continue to prefer this route over traditional bonuses—even though it offers no tax relief to employees.

What is an ex gratia payment?

An ex gratia payment is a voluntary amount paid “out of kindness.” The term comes from Latin and refers to compensation offered without any legal or contractual obligation. Employers may offer it during retirements, restructuring, or special circumstances. Governments may offer ex-gratia assistance after disasters or accidents.

Crucially, there is no formula, no minimum or maximum limit, and no mandatory criteria. It is entirely at the payer’s discretion—based on goodwill, financial ability or a desire to compensate losses.

What happened at HDFC Bank?

HDFC Bank announced an ex gratia payout of Rs 1,500 crore after its merger with HDFC Ltd. It was positioned as a one-time ‘thank you’ for the staff’s extraordinary effort through the integration process. While this boosted morale and motivated employees, it also raised questions about taxation.

Why companies prefer ex gratia over bonuses

Tax advisory platform Tax Buddy and other financial experts explain why corporates often choose ex-gratia:

Reward extraordinary effort without revising salary structures.

Retain employees during mergers or transitions.

Boost morale and signal goodwill without creating future obligations.

Avoid linking payouts to performance or legal contracts.

In other words, ex gratia offers flexibility—a major advantage for large organisations navigating sensitive or unusual situations.

But here’s the catch

Under Section 17(3) of the Income-Tax Act, any ex gratia linked to employment is treated as “profits in lieu of salary.”
That means it is fully taxable, usually at the employee’s slab rate—often 20% to 30% for mid- to high-income earners.

This can push an employee into a higher tax bracket, reducing the net benefit significantly.

When can ex gratia be tax-free?

Ex gratia payments may be exempt only when:

They are purely voluntary, unrelated to employment or performance.

There is no service condition attached.

They are paid by the government after a calamity or disaster.

In such cases, the payment is considered a relief measure, not income.

In one of its FAQs, CBDT has clarified: ​"If a person or his heir receives ex gratia from the Central govt/state govt/ local authority/Public Sector Undertaking due to injury to the person/death while on duty, such ex-gratia payment will not be taxable."

What employees should check

Experts advise employees to review carefully:

How the ex gratia is shown in Form 16 or salary slips.

Whether TDS has been deducted.

If the payment spikes income suddenly, Section 89(1) relief may help reduce tax liability.

Why this story matters

HDFC Bank’s massive payout highlights a broader corporate trend:

Ex-gratia is becoming a preferred tool for retention, morale-building and public relations.
But for employees, it often results in a tax hit that quietly shrinks the real benefit.

Ex gratia vs salaries vs gratuity vs bonuses

According to ClearTax, ex gratia differs from salaries, gratuity or bonuses because it is discretionary, not mandatory. It helps organisations offer financial support without admitting liability and preserves goodwill during complex or sensitive events. However, despite its compassionate framing, it remains subject to taxation—unless it qualifies as genuine relief.

As more companies use ex gratia payments to navigate mergers, restructuring, or employee retention, understanding the tax implications becomes crucial. For many employees, the difference between “generous gesture” and “taxable income” can be tens of thousands of rupees.

Feature                   Ex-Gratia Payment                   Other Types of Compensation

Legal Obligation    No legal obligation                      Legally required (salary, wages, benefits)
Purpose                 Voluntary; gesture of goodwill    Required by law or contract
Frequency              Usually a one-time payment      Regular payments (weekly, monthly, etc.)
Tax Implications      May be taxable                         Generally taxable