Taxman’s Diwali surprise: Gifts and bonuses could add to your tax bill; check details

As the festival of lights draws near, homes and offices across India are preparing for the annual exchange of sweets, gifts, and bonuses — a hallmark of Diwali celebrations. But while these festive rewards spread joy, few realise that some of them could also invite the attention of the tax department.

Tax advisory platform Tax Buddy recently highlighted a real-life example that went viral on social media platform X. Arjun, a corporate employee, received a generous Diwali package from his employer:

Rs 80,000 as a cash bonus

An Apple Watch worth Rs 25,000

What seemed like a festive windfall ultimately cost him Rs 32,760 in taxes.

Here’s how the taxman views your Diwali rewards:

1. Bonuses are taxable as salary

Under Section 17(1) of the Income Tax Act, any Diwali bonus is treated as part of your salary income. That means it’s fully taxable and subject to TDS (Tax Deducted at Source) by your employer as per your income slab.

In Arjun’s case, his Rs 80,000 bonus fell under the 30% slab, leading to a tax of ₹24,960 (including 4% cess).

2. Gifts from your employer aren’t always tax-free

Non-cash gifts — like gadgets, vouchers, or hampers — are considered perquisites under Section 17(2)(viii). Gifts up to Rs 5,000 in a financial year are exempt. But if the total value exceeds Rs 5,000, the entire amount becomes taxable, not just the excess.

So, Arjun’s Apple Watch worth Rs 25,000 was fully taxable, adding another Rs 7,800 to his tax liability.

Total tax hit: Rs 24,960 (bonus) + Rs 7,800 (gift) = Rs 32,760

3. Even festive hampers and vouchers can be taxed

Tax applies to a wide range of employer-provided benefits during Diwali, including:

Gift vouchers and coupons

Electronics or gadgets

Paid holidays or travel packages

Festival hampers if their value exceeds Rs 5,000

Essentially, any non-cash gift from your employer that crosses the exemption threshold can be added to your taxable income.

4. GST implications for employers

There’s also a GST twist. If an employer gifts items worth more than ₹50,000 per employee per year, it attracts GST, and the company cannot claim Input Tax Credit (ITC) on those gifts. So, even companies need to tread carefully while spreading festive cheer.

5. Avoid festive tax shocks

Tax experts advise employees to:

Ensure bonuses and gifts are correctly reported in Form 16.

Verify that TDS has been deducted accurately.

Keep invoices and proof of gifts handy in case of queries from the Income Tax Department.

In nutshell

A gift can be money (cash or cheque), immovable property like land or buildings, or movable assets such as gold, jewellery, or shares. Gift tax in India was first introduced under the Gift Tax Act, 1958, but was abolished in 1998, making all gifts tax-free. However, it was reintroduced in 2004 under the Income Tax Act. Gifts received by an individual or Hindu Undivided Family (HUF) up to Rs 50,000 in a financial year are tax-exempt. If the total exceeds Rs 50,000, the entire amount becomes taxable as “Income from Other Sources.”

Gifts from defined relatives, such as parents or siblings, are fully exempt regardless of value. Property received below stamp duty value is taxed on the difference if it exceeds Rs 50,000. Employer gifts above Rs 5,000 are taxable as salary. GST applies to business gifts exceeding Rs 50,000. To avoid gift tax, it’s advisable to keep gift values within exemption limits or invest the gifted amount wisely.

While the Gift Tax Act was scrapped in 1998, the taxation of bonuses and employer gifts remains alive and well. So this Diwali, when you receive that festive reward, remember — the Income Tax Department might just be celebrating with you.