ex gratia payments, which are additional payments made without legal obligation, are generally not taxable. 

2) ex-gratia payment constitutes a capital receipt, thus not taxable under section 17(3).

• Ex gratia payment in employment context is generally treated as taxable salary income, not capital receipt, even if called “discretionary.”

• Since it was part of the F&F settlement and TDS was deducted in Form 16, it will be assessed under the head “Income from Salary.”

• The fact that Form 12BA is blank only means it wasn’t treated as a perquisite; it does not change taxability.

• Pro-rata bonus is also taxable salary, even if company policy conditions weren’t met but still paid.

Your case is an additional discretionary ex gratia payment.

These payments come under the employment contract. However, an ex gratia payment is an extra payment made by the employer, and such an amount without any legal obligation is not taxable. In other words, Ex gratia payments are not taxable in India, unless they are made in lieu of salary or wages. But it will be taxable as salary income under Section 17(3) of the Income Tax Act, 1961 if paid in lieu of salary on losing the job. This is because ex-gratia payments made by employers to employees in connection with termination of employment are treated as "profits in lieu of salary" and are subject to regular income tax rates.

Of course non statutory pro rata bonus do not come under taxable income.

You may file your ITR accordingly and claim refund of aTDS made by the employer for the reasons and citations you rely upon.

Ex gratia paid on job loss is normally taxable as salary (Sec 17(3)), which is why TDS was deducted and shown in Form 16. Courts have in some cases treated such payments as capital (non-taxable) if they are purely voluntary and not linked to services, but since your employer has classified and taxed it as salary, safest is to show it as salary in ITR.

an ex gratia payment is an extra payment made by the employer, and such an amount without any legal obligation is not taxable. In other words, Ex gratia payments are not taxable in India, unless they are made in lieu of salary or wages.

Ex-gratia payment made voluntarily by an employer is taxable under Section 17 (3) and held in CIT v. Jamini Mohan.

I have already stated it would be regarded as capital receipt 

If it was declared as capital receipt then why would your employer deduct tax at source for the payment made to you.

You may ascertain the details in further through your auditor and proceed as advised.

ex gratia payments, which are additional payments made without legal obligation, are generally not taxable. This means that ex gratia payments aren't considered taxable income unless they're given in place of regular salary or wages.

In your husband’s case, the company paid a discretionary, voluntary ex gratia payment along with statutory dues and a pro rata bonus, with TDS deducted but Form 12BA left blank. You are specifically asking whether such ex gratia payments can be treated as a capital receipt—thus not taxable—and referring to judicial precedents that have supported the non-taxability of similar ex gratia severance payments.

The taxability depends on whether the payment constitutes “profits in lieu of salary” under Section 17(3) of the Income Tax Act or is a purely voluntary, discretionary payment without any contractual or statutory obligation. Several judicial rulings—including ITAT Ahmedabad (2025), Arunbhai R. Naik v. ITO, CIT v. Jamini Mohan Kar, and others—have held that truly voluntary and discretionary ex gratia payments made without any employer obligation, and not as compensation for service or termination, may be classified as capital receipts and not taxable as salary income. If the employer had no legal or contractual requirement to pay this amount and did so unconditionally and voluntarily, the amount does not fall within the purview of Section 17(3).

However, tax authorities and some recent industry practice generally treat severance-related ex gratia payments as “profits in lieu of salary” and thus taxable at the employee’s applicable slab rate, imposing TDS at source. The position is more nuanced if the payment is not linked to employment, service, or contractual settlements but is truly ex gratia and not compensation for loss of employment or in connection with termination.

Given that the payment is mentioned specifically as “discretionary ex gratia” and there are precedents supporting capital receipt treatment, you may claim a refund for the TDS deduction by reporting the amount as exempt/capital receipt in your tax return and citing relevant case law. Be prepared to defend the position if the tax department seeks clarification. The absence of reporting in Form 12BA further corroborates its non-contractual nature.

In summary, if the payment is purely voluntary with no employer obligation, you can argue—with judicial backing—that it is a capital receipt and claim a refund for any TDS deducted. If the department raises queries, rely on cited case law and correspondence from the employer.

For help in drafting your reply, supporting claims, or preparing your tax return accurately, please reach out for further consultation.

It is capital receipt 

try to save  taxes 

if any adverse order is passed you can go in appeal 

It’s not a taxable income if not given as salary if it’s given as salary then it will be taxable and will be under the head of receipts

Procedure for ₹21 Lakh Tax Saving

With ₹15 lakh tax vs ₹6 lakh refund at stake, take the aggressive capital receipt approach:

ITR Filing Process:

1. Show under "Income from Other Sources" with NIL taxable value - not salary head

2. Attach Form 16 but include explanation claiming capital receipt treatment

3. File claiming refund based on strong legal precedents

Legal Support:

• CIT v. Jamini Mohan Kar (1989) - Voluntary ex gratia not taxable

• Arunbhai R. Naik v. ITO (2015) - No obligation = capital receipt

• Recent ITAT Ahmedabad (2025) - Severance compensation is capital

Expected Timeline:

• Intimation query → Reply with legal grounds

• Assessment scrutiny → CIT(A) appeal with precedents

• ITAT appeal if needed → Recent favorable rulings

• Refund timeline: 6-24 months post successful appeal

Key Arguments:

Settlement letter says "additional discretionary" payment, voluntary without legal obligation, capital compensation for employment loss.

Bottom Line: Strong legal precedents justify the risk for ₹21 lakh differential. File aggressively with proper documentation.

Ex-gratia on termination is fully taxable under Section 17(3) unless it qualifies under Section 10(10B) (retrenchment) or Section 10(10C) (VRS), both of which have strict applicability conditions.

However there is a precedence, you may see if that will be suitable to your situation: