Under the Income Tax Rules, gifts and vouchers received by an employee during the festive season are not subject to tax, provided their total value for the entire year does not exceed Rs 15,000. If the value exceeds this amount, the entire sum becomes taxable.
What Is the Limit on the Value of Gifts?
For gifts provided to dealers or clients, if their annual value exceeds ₹20,000, TDS (Tax Deducted at Source) is applicable at a rate of 10% under Section 393 (formerly Section 194). According to GST regulations, gifts provided to employees with an annual value of up to ₹50,000 are not considered a ‘supply.’ Under Section 17(5)(h), no GST Input Tax Credit (ITC) is available on such gifts.
Previously, this limit was ₹5,000; it has now been increased to ₹15,000. However, if the total value exceeds ₹15,000, the entire amount will be taxed as a ‘perquisite’. Cash gifts, gift cheques, and Diwali bonuses are fully taxable as salary.
For instance, if an employee receives a Diwali voucher of Rs 10,000 and a birthday gift of Rs 6,000 in the same year, the entire Rs 16,000 is taxable. Employers must include the taxable value in the salary and deduct TDS u/s 392 of the Income Tax Act, 2025. Details of this perquisite are also to be declared in Form 130.
Applicable TDS Rate on Gifts
Gifts provided to clients, dealers, distributors, and other business associates are subject to Tax Deducted at Source (TDS) u/s 393 of the Income-tax Act, 2025, which substitutes the earlier Section 194R. TDS is applicable at a rate of 10% if the total value of benefits given to a resident recipient in the fiscal year is more than Rs 20,000.
When this limit is crossed, TDS applies to the entire value of the benefits, not just the amount that is over Rs 20,000. Additionally, GST is not included in the calculation of the benefit’s value, as stated by CBDT Circular No. 18/2022. It is essential that the tax is deducted or paid before the benefits are provided.
Under GST, gifts provided by employers to employees are not considered a ‘supply’, provided that the total value of gifts given to an employee in a financial year does not exceed ₹50,000. If the same limit is exceeded, then the gifts fall under the taxable supplies.
Gifts given to clients and dealers typically do not incur output GST because they are provided without consideration and do not come under the related-person provisions outlined in Schedule I.
Goods and Services Tax (GST) on Gifts
It’s important for businesses to note that the Input Tax Credit (ITC) for goods given as gifts is blocked under Section 17(5)(h) of the CGST Act, 2017. This restriction applies to gifts provided to employees, clients, and dealers, even if they are intended for business purposes.
The GST rules for gift vouchers are different. As per CBIC Circular No. 243/37/2024-GST, the purchase or issuance of a voucher is not considered a supply of goods or services. Generally, GST becomes applicable only when the voucher is redeemed (used). However, vouchers still fall within the purview of applicable income tax and TDS (Tax Deducted at Source) provisions.
Businesses can generally treat the cost of gifts given during Diwali as a business expense, provided that the expenditure is incurred entirely for business purposes.
They should maintain purchase invoices, details of recipients, records of gifts given to employees, and records of TDS payments to support their tax-related matters. Thus, companies must examine their annual gifting budgets to comply with income tax, TDS, and GST requirements and avoid unnecessary tax liabilities.
