In the midst of the festive Diwali season, many employers are expressing appreciation for their employees through gifts, fostering a positive workplace atmosphere. This tradition of gifting not only boosts morale but also acknowledges the diverse culture in the organisation. Gifts are often exchanged during key celebrations such as Diwali, as well as on special occasions like work anniversaries, birthdays, and significant achievements. In some cases, employers also reward outstanding performance with gifts.
While gifts can take various forms, including cash, gift cards, own company products, vouchers or prepaid cards, it’s essential to understand the tax implications associated with them.
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Is Diwali gift by an employer taxable?
According to income tax regulations, any gift, voucher, or token received by employees or their family members from their employer is categorized as a taxable perquisite. Notably, if the total value of these gifts remains up to Rs 4,999 during a financial year, they are exempt from income tax. The exemption limit of Rs. 4999 is an annual limit and covers gifts on all occasions like birthdays, marriage, anniversaries, other festivals, etc during the year.
However, gifts value exceeding Rs 4,999 will be subject to tax. The Rs 4,999 exemption is generally relevant when gifts are distributed to all employees during ceremonial occasions or otherwise.
The tax exemption of up to Rs 4,999 for gifts received from employer during a ceremonial occasion or otherwise is applicable on all types of gifts, except cash. This includes e-voucher, gift card, prepaid card etc.
Further, cash given as a gift is taxable as employee’s regular salary. Even Re 1 received in cash as Diwali gift will be taxable in the hands of an employee. There is no tax exemption available on the cash received as Diwali gift from the employer.
Here is an example to understand this. Suppose an employee has received Rs. 3,100 in cash and home décor item of Rs. 2500 from the employer as Diwali gift. There are divergent views on this matter, wherein one may consider the entire amount of Rs. 5,600 as taxable, however there are arguments basis Circular no: 15 of 2001 that amount of cash gift of Rs. 3,100 will be fully taxable and home décor gift of Rs. 2,500 is not taxable as the value does not exceed the limit of Rs. 4,999.
How much value of gifts can be received without tax?
It is important to note that if the total value of gifts reaches Rs 5,000 or more in a financial year, the entire amount becomes taxable. For instance, if an employee receives two gifts within a financial year-one valued at Rs 4,000 and another at Rs 3,000-the total of Rs 7,000 will be fully taxable. The exemption for gifts below Rs 5,000 is applicable across different tax regimes.
If gifts are given to select employees as recognition for specific skills or exceptional performance, these gifts are classified as emoluments and taxed as salary. This will be taxed as per your applicable income tax slab rates.
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Employers’ gifting their own branded products
A common query arises regarding the income tax implications of companies distributing their own branded products, such as apparel or gadgets, to employees. For example, Companies /employers distributing own products to their employees as Diwali gifts will not be taxable unless the value of the gift exceeds Rs. 4,999.
Conclusion
Given the complexities surrounding gift taxation, it is vital for employers to establish a streamlined process to monitor the taxable value of gifts provided to employees. This practice will ensure compliance with tax regulations, especially concerning the requirement for tax deduction at source from employee’s salary.
