Diwali, the festival of lights, is celebrated with cheer and enthusiasm in India. So much so that many companies prefer to give holiday bonuses around Diwali. Companies in India are governed when it comes to giving bonuses by The Bonus Act, 1965. The limit for bonuses given to employees has recently been raised.
On the other hand, gifts are not treated the same as bonuses. What's the difference?
You will be taxed on any bonus received from your employer as part of your salary. In contrast, any gift from the employer is treated as taxable income if the total exceeds Rs. 5,000. The Income Tax Act specifies that any gift received by an employee over Rs. 5,000 counts as a payment by the company. As a result, the employer is required to deduct taxes as well.
As a result, employers may give you gifts or bonuses on special occasions, but these gifts and bonuses do not have to be tax-exempt. The first thing to do is to determine the value of such a gift or bonus and check if it exceeds Rs. 5000. The next step is to determine whether the payment was in cash or kind. The best practice is to disclose all such receipts in the tax return and let the taxman know the full details so that s/he can estimate your tax liability correctly.
Here's an example:
On Diwali, Company A decided to give bonuses to all of its employees. All employees received a bonus of Rs. 4,500. Income Tax laws consider any amount received by an employee as salary income as long as it is earned in connection with employment. Therefore, the bonus will be listed as income in the tax return under the salary category.
Interestingly, if company A had decided to give it as a gift, voucher, or token instead of a bonus to an employee, it would not have been subject to tax because the value was less than Rs. 5,000. If these gift vouchers or tokens were valued at more than Rs. 5,000, then they would have been taxed as salary income at the applicable slab rate.
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