Future Generali

Are festival bonuses at work taxable?

In India, Diwali, the festival of lights, is celebrated with cheer and grandeur. So much so, that most companies prefer to give festival bonuses around Diwali. In India, companies are governed by The Bonus Act, 1965 when they give bonuses. The recent amendment to the Act increased the limit for bonuses to employees.

Gifts, on the other hand, are not treated the same as a bonus. The difference? Any amount received in the form of a bonus from your employer will be considered part of your salary and taxed as such. Whereas, any gift from the employer is treated as a taxable salary if the total sum exceeds ₹5,000. According to the relevant sections of the Income Tax Act, any gift received by an employee above ₹ 5,000 in value is to be considered compensation by the company. This means that the employer is also required to deduct taxes in advance.

Therefore, it is important to note that employers may provide you with gifts or bonuses on special occasions but it is not necessary that these bonuses or gifts will be automatically tax-exempt. Instead, it is first necessary to check the value of such a gift or bonus and find out if it is more than ₹5,000. And then, it has to be determined if the form was in cash or kind. The best practice is usually to disclose all such receipts in the tax returns and let the taxman have the full information so that they can estimate your tax liability correctly.

Let’s take an example

Company A decided to give bonuses to all of its employees on the occasion of Diwali. The company announced a bonus of ₹ 4,500 for all employees. Since the Income Tax laws treat any amount received by an employee from their company due to their employment as salary income, the bonus received will be taxable as income under the head salaries in the tax return.

Interestingly, if company A decided to give it as a gift, voucher or token rather than bonus to an employee, it would have not been subject to tax, since the total value was below ₹ 5,000. However, if these gift vouchers or tokens were valued at more than ₹ 5,000, then they would have been treated as salary income and taxed according to the relevant slab rates.

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