"The families of the 85 who died and seven missing will receive 300,000 baht each, while 11 injured will receive 80,000 baht compensation," Danuphorn Punakanta, deputy government spokesman told a press conference.
About 85 Muslim protesters died at Tak Bai in Narathiwat province after security forces broke up a riot, piled almost 1300 people onto trucks and kept them there for nearly six hours. Most victims died through suffocation and some broke their necks.
They were demanding the release of six men arrested for allegedly giving guns to Muslim rebels.
Prime Minister Thaksin Shinawatra in October said a public holiday meant there were too few trucks to hold the 1298 people arrested, and those arrested could not breathe or drink water.
Thaksin's government has faced widespread criticism for its heavy-handed response to the Islamic uprising in the mostly-Muslim southern provinces, although a series of peace efforts were being launched this week.
There have been near-daily attacks in the south of the mainly Buddhist nation.
The most recent came on Sunday when at least 15 railway workers and security forces were injured in two bomb blasts and an hour-long gun battle at the Sungai Padi railway station in Narathiwat.
Thaksin's government has been
criticised for its tough approach
The bombs exploded one day after a Buddhist worker was shot dead and two other people including a state railway worker were injured in two attacks in Narathiwat and neighbouring Yala province.
Thaksin on Tuesday instructed Interior Minister General Chidchai Vanasathidya and Defence Minister General Thammarak Issarangkura Na Ayutthaya to turn their focus to "outreach, understanding, and development".
The cabinet decreed 10 April as national religious reconciliation day in order to reduce tensions.
Muslims comprise 4% of Thailand's almost 64 million people and most live in southern provinces bordering Malaysia.
More than 630 people have been killed in the south since an Muslim uprising began in January 2004.