Ex Gratia: Meaning, Rules & Bonus Difference

What Is an Ex Gratia Payment?

Every Diwali, some employers hand over more than the law asks of them.

An ex gratia payment is money an employer pays without being legally obliged to pay it. In India, the Code on Wages, 2019 caps the bonus you must pay at 20% of wages. Anything above that maximum, or paid to someone the bonus rules miss, is goodwill rather than bonus.

Ex gratia is Latin for “out of grace”. The band belongs to the law, and the part above it is yours. The two need different labels in your records.

Where the Law Stops and Goodwill Begins

Section 26 of the Code on Wages sets a minimum and a maximum on bonus. Both are percentages of the wages that count for the accounting year.

Four branches decide whether a payment is bonus or goodwill:

• The wage ceiling is notified, not fixed. Bonus covers employees who earn up to a figure the government notifies. Check the figure in force before you call anyone ineligible.
• Above 20% is never bonus. Section 26(5) says even an agreed productivity bonus cannot push the total past 20% of wages earned.
• A second figure caps the sum. Section 26(2) deals with higher earners. If wages go past another notified amount, the bonus is worked out on that amount instead. The minimum wage applies where it is higher.
• A goodwill payment on exit sits outside pay. The definition of wages leaves it out when it is paid on termination, so it does not feed your provident fund sums.

Ex Gratia vs Statutory Bonus

Both land in the same bank transfer, and staff read them as one number. They are not the same thing.

Section 29 names the only exceptions. Four grounds take the bonus away, and each needs a dismissal. They are fraud, theft, violence, or a conviction for sexual harassment. Once the Code’s bonus is paid, everything further is your choice.

Ex Gratia Example

A ceramic tile maker (an example) in Pune employs 48 people. One supervisor earns ₹18,400 a month, inside both notified limits, so ₹2,20,800 across the accounting year ending 31 March 2026.

Note: this is an invented example for illustration only. The business, headcount, wages and dates are made up.

The owner cannot book all ₹50,000 as bonus. The maximum is ₹44,160, so the last ₹5,840 is voluntary. Writing it that way keeps the bonus register honest, and an inspector can follow it.

When a Festival Payment Counts as Bonus

Here is the part almost nobody writes about. Section 37 allows a set-off. Say you have already paid a puja bonus, or any other customary bonus. You can take that off the bonus you owe for the year, and the employee gets only the balance.

So a festival payment is not always extra money. If it has become customary in your workplace, it counts towards the statutory bill instead of sitting on top of it.

A hotel in Jaipur that has paid the same Diwali amount for nine years stands differently from a retail chain trying it once. The safer habit is to write down, before you pay, whether a payment is customary or a one-off.

See Which Payouts Were Ex Gratia

Telling bonus from goodwill is only possible when the two leave separate records. Attendo (formerly Petpooja Payroll) is a complete workforce management system for every kind of business. One-off payouts go in under their own salary head, so they are never swallowed into one bonus figure.

Each finalised run carries an Other Earnings export that breaks incentives and bonuses out line by line. Our salary sheet and payroll register template shows the columns this needs. If you pay past the Code’s 20%, you can see how Attendo works.

Frequently Asked Questions