Diwali or any festival for that matter is the season of giving — but when the gift comes from an employer, tax rules kick in. This article summarizes the key points under GST and Income-tax.
1) GST: short summary (what employers should watch for)
First and foremost, what needs to be noted is that employer and employee are deemed to be related persons under explanation to section 15. Employer-employee relationship means there is a formal service agreement between the two, if the agreement is only for retainership or professional engagement then it cannot be termed as service agreement and shall not tantamount to employer employee relationship.
From this perspective, in fact both income tax and GST offer different tax treatment or for that matter, relationship status between the two of them- in income tax both are unrelated persons or non- relatives but in GST both are deemed to be related!!
- When GST does not generally apply: Gifts given by an employer to an employee are not treated as a “supply” for GST purposes if the aggregate value to the employee in a financial year is ≤ ₹50,000 (refer Schedule I of the CGST Act, 2017. Which means that any gifts upto the value of Rs. 50000/- shall not be deemed to be supply in the hands of the employer.)
- When GST applies: If the annual value of gifts to an employee exceeds ₹50,000, the employer’s transfer may be treated as a supply (taxable). The applicable GST rate depends on the nature of goods (e.g., 18% for standard items), and GST may arise on the entire value.
- Input Tax Credit (ITC): ITC on gifts to employees is not claimable being specifically blocked under Section 17(5). However, if it qualifies to be deemed supply under Schedule I, then ITC can be claimed.
- The treatment may be different if the gifts are in fact differently nomenclature such as as performance-based rewards or incentives.
2) Income Tax: short summary (what employees and employers should watch for)
Gifts from employer → Perquisite: Any gift/benefit from an employer is ordinarily treated as a perquisite under Section 17 and included in the employee’s taxable salary.
It may be noted that cash gifts upto Rs 5000/- are not taxable to the employee but anything above that will be fully taxable.
3) Practical compliance checklist for employers (HR / payroll / accounts)
1. Maintain gift registers showing item, value, recipient and date; aggregate per employee per FY.
2. Decide classification (gift vs reward vs performance bonus) and document policy — classification affects both GST and income-tax treatment.
3. If gift value per employee per FY ≤ ₹50,000 and genuinely a token gift, GST likely not applicable — still keep supporting invoices.
4. If gift value > ₹50,000, account for GST (treat supply): issue invoices/record appropriately; consider whether ITC can be claimed on purchase and whether reversal/blocked credit rules apply.
5. For payroll — include taxable perquisites in Form 16 and payroll runs; withhold tax where required.
4) Example
A company gives each employee a hamper worth ₹6,000 on Diwali. Under income-tax practice the ₹6,000 is a perquisite and taxable as part of salary (practical guidance treats de-minimis gifts under ₹5,000 differently). Under GST, since ₹6,000 < ₹50,000, GST is generally not treated as supply (no GST liability on employer). Employer should include ₹6,000 in the employee’s salary record for taxability.
4) Whether gifts to employees can be claimed as business expense:
Yes, it can be, if it can be shown that gifts to employees were in the normal course of business and has a business nexus. These expenses can be claimed under different heads such as festival celebration expenses, employee welfare, staff welfare, business promotion etc.
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