Last reviewed: 13 October 2026. Diwali hampers, sweet boxes, bonus cheques and dealer trips are bought in the same fortnight, usually by the admin team, and booked to one ledger called "Diwali expenses". Three different tax regimes then apply to the same spend: income tax on the employee, GST on the employer's input credit, and TDS on benefits given to business associates. This note separates them so that the books are right before the year-end clean-up.
1. Who is receiving what: the four-way split
Start by tagging every festive item to one of four recipient groups. The tax result depends on the recipient and the form of the gift, not on the festival.
| Recipient | Income tax position | GST position | TDS |
|---|---|---|---|
| Employee, cash bonus | Taxable salary | Outside GST (services by employee in the course of employment) | Salary TDS, section 392 (old 192) |
| Employee, non-cash gift or voucher | Nil perquisite if the tax-year aggregate stays within Rs 15,000; above that, the whole value is generally treated as a perquisite | Not a supply up to Rs 50,000 per year; ITC on the goods blocked under 17(5)(h) | Only if the perquisite is taxable |
| Dealer, distributor, vendor | Business promotion expense for the giver, if documented | Free gift: not a supply, ITC blocked | 10% under the section 393(1) benefit entry (old 194R) above Rs 20,000 in the year |
| Retail customer (promotion) | Business promotion expense | Free gift blocked; "buy one get one" treated differently (see below) | Not applicable to consumers |
2. Employees: bonus versus gifts
A Diwali bonus is salary. It is added to the employee's income for the year and the employer must include it when estimating annual salary for TDS. Many payroll teams forget the bonus in the November cycle and then discover a shortfall in March. If the bonus is paid in the festive month, re-run the projected tax for the remaining months immediately. The Q2 TDS statement, due 31 October 2026, will show the bonus only if it was paid in July to September; see our TDS return note for FY 2026-27 for the form changes.
Gifts are different. Under the Income-tax Rules, 1962 a gift, voucher or token in non-cash form was ignored as a perquisite if its value was Rs 5,000 or less in the year. The Income-tax Rules, 2026, notified on 20 March 2026 under the Income-tax Act, 2025, raise this to Rs 15,000 aggregate in the tax year. Two practical points follow:
- The limit is an aggregate for the tax year, so a Diwali hamper and an anniversary voucher in the same year add up.
- Cash, and a gift card that can be encashed, get no benefit. They are salary.
Please confirm the rule number and the exact boundary wording (at or under, or below Rs 15,000) from the notified Rules before you issue payroll instructions; we have seen secondary sources describe it inconsistently.
Worked example 1: a Rs 6,000 hamper for 40 employees
| Item | Amount (Rs) |
|---|---|
| Cost per hamper before GST | 6,000 |
| GST at 18% per hamper | 1,080 |
| Total cost per hamper | 7,080 |
| Total spend for 40 employees | 2,83,200 |
| GST in that spend (ITC to be reversed) | 43,200 |
| Perquisite per employee (within Rs 15,000) | Nil |
| Output GST on the gift (within Rs 50,000) | Nil |
The employees pay no tax and the employer pays no output GST, but the Rs 43,200 of input tax is not recoverable. The cost to the company is the full Rs 2,83,200 and the question is only whether the deduction as staff welfare is supportable, which it ordinarily is when the gift is made to all staff on the same basis.
Worked example 2: gift crosses the income tax limit
An employee has received a Rs 12,000 hamper and a Rs 5,000 retail voucher in the same tax year. The aggregate is Rs 17,000, which exceeds Rs 15,000, so the whole Rs 17,000 is taxed as a perquisite and not just the Rs 2,000 above the limit. At a 30% marginal slab, the tax is Rs 5,100 plus 4% cess, Rs 5,304 in all. Trim the voucher to Rs 3,000 and the perquisite is nil.
3. GST: Schedule I, Section 17(5)(h) and the Rs 50,000 line
There are two different questions and they are often merged. The first is whether giving the gift is itself a taxable supply. Entry 2 of Schedule I to the CGST Act treats supplies between related persons, including an employer and employee, as supplies even without consideration. The proviso carves out gifts by an employer to an employee that do not exceed Rs 50,000 in value in a financial year. Below that line, no GST is payable on the gift.
The second question is whether the employer can keep the input tax credit. Section 17(5)(h) blocks ITC on goods disposed of by way of gift or free samples. CBIC Circular No. 92/11/2019-GST dated 7 March 2019 applied this to free gifts and samples, and said ITC is not blocked where the free item is a supply under Schedule I. So the employer who stays under the Rs 50,000 line pays no GST on the gift but loses the credit, and an employer who crosses the line charges GST on the supply and, on the circular's logic, can retain the credit. The Rs 50,000 proviso is worded "not exceeding", and there is no official clarification on whether the whole value or only the excess becomes taxable once it is crossed. The cautious practice is to treat the whole value as a supply and to record the reasoning in a file note.
Perquisites that an employer provides under the employment contract are separately dealt with in Circular No. 172/04/2022-GST dated 6 July 2022, which says they are not subjected to GST when provided in terms of the contract. A cash bonus is on the same footing.
The reversal itself goes into GSTR-3B Table 4(B)(1) in the month the gifts are distributed, and the working should be kept with the purchase invoice. Our section 17(5) list of blocked credits covers the other items that tend to appear in the same fortnight, and the month-end close checklist shows where the reversal fits in the close.
Worked example 3: sweets and hampers for clients
A company buys 100 client hampers at Rs 2,000 each plus 18% GST, a total of Rs 2,36,000. GST is Rs 36,000. If the hampers are free gifts, the whole Rs 36,000 is reversed. If instead a seller runs a "buy one, get one free" promotion for customers, Circular 92/11/2019 treats it as two or more supplies for the price of one rather than a free gift, so section 17(5)(h) is not engaged and ITC is available, provided the offer is documented in the invoice and the pricing is not a disguised gift.
4. Dealers, distributors and vendors: TDS on benefits
When a hamper, a gold coin, a foreign trip or a car is given to a business associate, the benefit rules apply. Section 194R of the 1961 Act, carried into the section 393(1) table of the Income-tax Act, 2025, requires 10% TDS on the value of the benefit where the aggregate for the financial year to a resident exceeds Rs 20,000. If the benefit is wholly in kind, the provider has to ensure the tax is paid before releasing it. The provision has an exemption for individuals and HUFs with small business or professional turnover, which has been carried forward from the old section.
This is where Diwali spending creates exposure. A hamper alone may stay below Rs 20,000, but the hamper, a festive discount in kind and a sponsored trip to the same dealer are added together for the year. For the valuation questions that recur in audits, read our note on section 194R valuation disputes.
Worked example 4: one dealer, three benefits
A distributor receives a Rs 9,000 hamper in October, a Rs 17,000 sponsored trip in November and nothing else during the year. The aggregate is Rs 26,000, which exceeds Rs 20,000, so TDS at 10% is Rs 2,600. Because the benefit is in kind, the company has to deposit Rs 2,600 from its own funds before the trip is released, or recover it from the distributor, and report it in the TDS statement with the benefit code.
5. What the recipient should know
An individual who is not an employee and receives a gift worth more than Rs 50,000 in aggregate in a year from a non-relative is taxed on it as income from other sources. A gift from the employer is dealt with as a perquisite and not under that provision. Our note on gift taxation for individuals sets out the relative list and the exemptions.
6. Festive-season checklist for the accounts team
- Open three ledgers: staff bonus, staff gifts, and business-promotion gifts, with one sub-ledger per recipient group.
- Keep a register of gifts per employee for the tax year and check it against Rs 15,000 before each new issue.
- Reverse ITC on all gifts in GSTR-3B Table 4(B)(1) for the month of distribution and attach the working.
- Build a PAN-wise benefit register for dealers, vendors and agents and test it against Rs 20,000 before payment of the last benefit.
- Add the bonus to the payroll projection immediately so that TDS in the remaining months is not understated.
- Retain the board or management approval, the distribution list and the invoices for each category.
Common mistakes
- Booking hampers to "office expenses" and taking full ITC on the purchase.
- Giving a cash gift card and treating it as a non-cash gift.
- Applying the Rs 15,000 income tax limit to the GST position, or the other way round. They are separate limits for separate laws.
- Ignoring the benefit TDS because each gift looks small, without adding up the year.
- Forgetting that the older Rs 5,000 limit is no longer the law for the current tax year.
Frequently asked questions
Is a Diwali bonus taxable for the employee?
Yes. A bonus paid in cash is part of salary and is taxed in the year of receipt at the employee's slab rate. The employer deducts tax on it through monthly salary TDS (section 392 of the Income-tax Act, 2025, earlier section 192) by adding it to the projected annual salary.
What is the tax-free limit for Diwali gifts from an employer?
Under the Income-tax Rules, 2026 (notified 20 March 2026), non-cash gifts, vouchers and tokens are not taxed as a perquisite if their aggregate value in the tax year stays within Rs 15,000, up from Rs 5,000 under the old rules. Cash and cash equivalents have no such limit. Confirm the exact rule wording and the treatment of the boundary before you finalise payroll.
Does GST apply to Diwali gifts given to employees?
Under the proviso to Entry 2 of Schedule I of the CGST Act, gifts by an employer to an employee not exceeding Rs 50,000 in a financial year are not treated as a supply. A cash bonus is consideration for employment services and is outside GST. Gifts above the Rs 50,000 limit need a documented GST view.
Can we claim input tax credit on hampers and sweets gifted to staff or clients?
Generally no. Section 17(5)(h) of the CGST Act blocks ITC on goods disposed of by way of gift or free samples, and the credit has to be reversed through Table 4(B)(1) of GSTR-3B. Where the gift is a taxable supply because it crosses the Rs 50,000 limit, the position differs and should be documented.
Is TDS required on gifts given to dealers and distributors?
It can be. TDS on benefits or perquisites arising from business (section 194R of the 1961 Act, now in the section 393(1) table) applies at 10% where the value of benefits to a resident recipient exceeds Rs 20,000 in the financial year. For gifts given in kind, the provider has to ensure the tax is paid before the benefit is released.
Is a gift voucher the same as a cash gift?
For the income tax limit, a non-cash gift or voucher is treated differently from cash or an instrument that can be encashed. A voucher usable only to buy goods from a named outlet is non-cash, while a cash-equivalent gift card or a transfer to a bank account is likely to be treated as cash. Check the terms of the voucher.
Are gifts to clients and vendors deductible as a business expense?
Gifts that are genuinely connected with the business and properly documented are generally claimed as business promotion expenditure. The deduction does not extend to gifts that carry a prohibited purpose, and personal gifts to a proprietor's family are not business expenses.
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This note is for general information and is not advice on a specific transaction. Thresholds and rule references should be confirmed against the notified text before action. Prepared by CA Somesh Chandak & Associates, Thane.