Gifts are commonly exchanged during major celebrations like Diwali, as well as on special occasions like work anniversaries, birthdays, and significant achievements.
Employers may also reward exceptional performance with gifts.
Gifts can come in many forms, such as cash, gift cards, company products, vouchers, or prepaid cards, but it’s important to be aware of the tax implications related to them.
Are Diwali gifts from employers taxable?
Yes, gifts from employers are considered taxable. If the total value of gifts received by an employee during a financial year is up to Rs 4,999, they are exempt from income tax. This limit applies to gifts for all occasions, including birthdays, weddings, and festivals.
However, gifts value exceeding Rs 4,999 will be subject to tax. The Rs 4,999 exemption applies to all types of gifts except cash. For instance, cash gifts are taxed as regular salary, meaning even Rs 1 given in cash for Diwali is taxable.
Cash received as a Diwali gift from an employer is not tax-exempt.
Example
Suppose an employee receives Rs 4,100 in cash and a home decor item worth Rs 1,500 from the employer as a Diwali gift.
Opinions vary on this issue. Some argue that the total amount of Rs. 5,600 is taxable. However, based on Circular No. 15 of 2001, the cash gift of Rs. 4,100 is fully taxable, while the home decor gift of Rs. 1,500 is not taxable since it falls below the Rs. 4,999 limit.
What’s the maximum gift value that is exempt from tax?
Gifts valued up to Rs 4,999 can be received without incurring tax. However, if the total value of gifts in a financial year reaches Rs 5,000 or more, the entire amount becomes taxable.
For instance, if an employee receives one gift worth Rs 4,500 and another worth Rs 2,500, the total of Rs 7,000 will be fully taxable.
This exemption applies across different tax regimes. Gifts given to specific employees for exceptional performance are treated as salary and taxed according to the applicable income tax slab rates.
Regarding companies giving their own branded products, such as apparel or gadgets, these gifts are not taxable unless their total value exceeds Rs 4,999.
Given the complexities of gift taxation, it’s essential for employers to implement a clear process for tracking the taxable value of gifts given to employees. This will help ensure compliance with tax regulations, particularly regarding the need for tax deduction at source from employees’ salaries.
