Looking for expert help with Diwali gifts to employees tax, GST on gifts to clients, gift voucher perquisite, Section 194R TDS on gifts, ITC blocked on gifts? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
How are Diwali gifts taxed in 2026?
Gifts and vouchers to an employee are tax-free if the year's total stays below Rs 15,000 (Income-tax Rules, 2026). Cash gifts and Diwali bonuses are fully taxable salary. Gifts to dealers or clients attract 10% TDS once a recipient's yearly total exceeds Rs 20,000 (Section 393, earlier 194R). On the GST side, employee gifts up to Rs 50,000 a year are not a supply, and ITC on gifts is blocked under Section 17(5)(h).
Source: Income-tax Act, 2025; Income-tax Rules, 2026; CGST Act, 2017, Section 17(5)(h) and Schedule I; CBDT Circulars 12/2022 and 18/2022; CBIC Circular 243/37/2024-GST
Diwali falls in early November 2026, so finance teams are already budgeting for employee gifts, client hampers and festive vouchers. The rules have moved this year. From 1 April 2026, the Income-tax Rules, 2026 raised the tax-free employee gift limit from Rs 5,000 to Rs 15,000. Cash gifts stay fully taxable. The Rs 20,000 TDS threshold on business gifts carries over unchanged into Section 393 of the new Act, and the GST treatment is still set by the CGST Act.
This guide covers all three layers on one page: perquisite tax on employee gifts, TDS on client and dealer gifts, and GST with ITC on everything you buy to give away.
Income Tax on Gifts to Employees
The Rs 15,000 Annual Limit (Tax Year 2026-27)
Under the Income-tax Rules, 2026, effective 1 April 2026, gifts, vouchers and tokens given by an employer are valued at nil if their aggregate value in the tax year is below Rs 15,000 per employee. The earlier limit was Rs 5,000. It is one yearly limit, not a separate exemption for Diwali, birthdays and work anniversaries.
| Gift Type | Tax Treatment |
|---|---|
| Non-cash gifts, vouchers, tokens | Nil value if aggregate for the year is below Rs 15,000 |
| Cash gifts | Fully taxable at slab rates |
| Gift cheques or anything convertible to money | Fully taxable at slab rates |
| Diwali bonus | Fully taxable as salary |
The limit applies under both the old and new tax regimes, because it is a valuation rule for perquisites and not a deduction. For more on how the 2026 Rules revalued other benefits, see our salary perquisites guide under the Income Tax Rules 2026. Bonus taxation is covered in detail in income tax on bonus from employer.
The Threshold Trap
The rule values gifts at nil only while the aggregate stays below Rs 15,000. On a literal reading, it is a threshold, not a standard deduction: once the total reaches Rs 15,000, the whole amount can be taxed, not just the excess.
| Aggregate Gifts to One Employee in the Year | Taxable Perquisite (Literal Reading) |
|---|---|
| Rs 12,000 | Nil |
| Rs 14,999 | Nil |
| Rs 15,000 | Rs 15,000 |
| Rs 18,000 | Rs 18,000 |
A Rs 10,000 Diwali voucher plus a Rs 5,000 birthday gift in March takes the employee to Rs 15,000 and makes the full amount taxable. Keep a per-employee gift register in payroll, not just a Diwali budget line.
How the Perquisite Is Reported
If the limit is crossed, the employer adds the perquisite to salary, deducts TDS under Section 392 of the Income Tax Act 2025 (earlier Section 192), and reports it in the employee's Form 130, which replaced Form 16 from tax year 2026-27. Our Form 130 guide explains where perquisites appear. Gifts to employees are handled through salary TDS, so Section 393 TDS on benefits does not apply to them.
TDS on Gifts to Clients, Dealers and Business Associates
Gifts to dealers, distributors, channel partners, professionals and other business contacts are benefits or perquisites arising from business. From 1 April 2026 the TDS obligation sits in Section 393 of the Income Tax Act 2025, which carries forward Section 194R of the 1961 Act at 10%. For the full mechanics, see our Section 194R / 393 TDS guide.
The Rs 20,000 Threshold
No TDS is needed if the total value of benefits to a resident recipient in the tax year does not exceed Rs 20,000. Once the total crosses Rs 20,000, TDS applies on the entire value, not just the excess.
| Aggregate Benefit to One Recipient | TDS Applicable? | TDS Amount |
|---|---|---|
| Rs 18,000 | No | Nil |
| Rs 20,000 | No | Nil |
| Rs 25,000 | Yes | Rs 2,500 |
| Rs 50,000 | Yes | Rs 5,000 |
The threshold counts every benefit to that recipient in the year: the Diwali hamper, the incentive trip, free products and sponsored event tickets.
What Counts as a Benefit
| Covered | Not Covered |
|---|---|
| Gift hampers, electronics, gold coins | Trade discounts shown on the invoice |
| Gift vouchers | Cash discounts and rebates |
| Incentive trips and sponsored travel | Genuine reimbursements backed by invoices in the payer's name |
| Free goods given as sales incentives | Salary perquisites to employees (taxed under Section 392) |
Valuation: Exclude GST
Value the gift at its fair market value. If you bought it, the purchase price is the value. CBDT Circular 18/2022 clarified that the GST component is excluded from the value when computing TDS on benefits.
Timing: Before the Gift Is Handed Over
Tax must be deducted or paid before the benefit is provided. A gift in kind has no cash to deduct from, so the giver has two options:
- Ask the recipient to pay the TDS amount first, or
- Pay the TDS out of its own pocket. The TDS amount paid then becomes an additional benefit to the recipient.
Small Giver Exemption
The TDS obligation does not apply if the giver is an individual or HUF whose turnover in the preceding year did not exceed Rs 1 crore (business) or Rs 50 lakh (profession). Companies, firms and LLPs must deduct regardless of size.
Worked Example
A company gives a dealer a mobile phone for Diwali. The purchase price is Rs 35,000 plus Rs 6,300 GST, and it is the dealer's only benefit from the company this year.
| Particulars | Amount |
|---|---|
| Value of benefit (excluding GST) | Rs 35,000 |
| Threshold | Rs 20,000 (crossed) |
| TDS at 10% on entire value | Rs 3,500 |
The company collects Rs 3,500 from the dealer, or pays it itself, before handing over the phone. It deposits the tax and reports it in the quarterly TDS return.
GST on Employee Gifts: The Rs 50,000 Rule
GST uses a different threshold from income tax, and this is where most confusion comes from.
An employer and employee are related persons under GST. Schedule I, Entry 2 of the CGST Act, 2017 treats a free supply between related persons as a supply, but its proviso carves out gifts:
"Gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both."
| Gifts to One Employee in the Financial Year | GST Treatment |
|---|---|
| Up to Rs 50,000 | Not a supply, no output GST |
| Above Rs 50,000 | Treated as a supply, output GST on the value |
Once gifts cross Rs 50,000, GST is payable on the value of the gifts, not only the excess. The value is set under the valuation rules for related-party supplies, broadly the open market value.
Gifts to Clients and Dealers
A client or dealer is not a related person, and a gift has no consideration, so Schedule I does not apply. A Diwali gift to a client is not a supply and carries no output GST. The ITC on the purchase is still blocked, as the next section explains. CBIC Circular 92/11/2019-GST confirms the same position for free samples and gifts.
ITC on Gifts: Blocked Under Section 17(5)(h)
Section 17(5)(h) of the CGST Act, 2017 blocks input tax credit on goods disposed of by way of gift. This catches most finance teams, because the GST on hampers and electronics goes straight into cost.
| Gift Scenario | ITC Position |
|---|---|
| Gift to employee, yearly total up to Rs 50,000 | Blocked |
| Gift to employee, yearly total above Rs 50,000 (output GST paid) | Disputed. Some advisers claim ITC because output tax is paid, but Section 17(5)(h) has no carve-out. Take advice before claiming. |
| Gift to client or dealer | Blocked |
| Benefit provided under the employment contract | Not a "gift", but check the other 17(5) blocks (food, health services, club membership and more) |
The logic is simple: ITC exists to avoid tax on tax in a supply chain. Goods given away free end the chain, so credit is denied even when the gift has a genuine business purpose. For the general eligibility rules, see our ITC eligibility and GSTR-2B reconciliation guide. A similar block for CSR spending is covered in GST on CSR expenditure.
Practical step: If a gift purchase invoice shows up in GSTR-2B, do not claim that credit in GSTR-3B. If you already claimed it, reverse it with interest.
Gift Vouchers: No GST on Purchase
Vouchers work differently from hampers.
GST. CBIC Circular No. 243/37/2024-GST (31 December 2024) clarified that voucher transactions are neither a supply of goods nor a supply of services. GST is paid when the voucher is redeemed for goods or services, not when your company buys it. There is no GST on the voucher value, so there is no ITC to block. If a distributor charges a commission or service fee on top, that fee attracts GST, and its ITC falls under Section 17(5)(h) like any other gift cost.
Income tax. Vouchers to employees count toward the Rs 15,000 yearly limit. Vouchers to clients and dealers count toward the Rs 20,000 TDS threshold under Section 393.
Business Expense Deduction
Gifts to employees and to clients are normally deductible business expenses when they are wholly for business, booked as staff welfare or business promotion. Because the ITC is blocked, the GST paid becomes part of the cost and is deductible along with it.
| Item | Position |
|---|---|
| ITC on gift goods | Blocked under Section 17(5)(h) |
| Cost of gifts including GST | Deductible business expense, if wholly for business |
| Gift where Section 393 TDS was due but not deducted | TDS default: interest and penalty exposure for the giver |
Keep the paperwork: recipient list, purchase invoices, the per-employee gift register, and TDS challans for dealer gifts.
Worked Example: A Company's Diwali Gifting Budget
A company plans these Diwali gifts. Values are excluding GST, and these are the only gifts each recipient gets this year.
| Gift | Recipient | Value Each | Count | Total Value |
|---|---|---|---|---|
| Sweet hampers (GST 5%) | Employees | Rs 3,000 | 50 | Rs 1,50,000 |
| E-gift vouchers | Employees | Rs 10,000 | 50 | Rs 5,00,000 |
| Mobile phones (GST 18%) | Dealers | Rs 35,000 | 10 | Rs 3,50,000 |
Income Tax and TDS
| Item | Treatment |
|---|---|
| Per employee: hamper + voucher = Rs 13,000 | Below Rs 15,000, nil perquisite |
| Headroom left per employee for the rest of the year | Under Rs 2,000. Any further gift pushes the full amount into tax. |
| Phone to each dealer: Rs 35,000 | Above Rs 20,000, TDS Rs 3,500 per dealer |
| Total TDS on dealer gifts | Rs 35,000 |
GST and ITC
| Item | GST Paid on Purchase | Output GST | ITC |
|---|---|---|---|
| Sweet hampers | Rs 7,500 | None (under Rs 50,000 per employee) | Blocked |
| E-gift vouchers | Nil (Circular 243/37/2024-GST) | None | Not applicable |
| Mobile phones to dealers | Rs 63,000 | None (not a supply) | Blocked |
ITC lost: Rs 70,500 (Rs 7,500 + Rs 63,000). It is not a loss for income tax purposes: the full Rs 10,70,500 (Rs 10,00,000 cost plus Rs 70,500 GST) is a deductible business expense.
Key Takeaways
| Point | Rule |
|---|---|
| Employee gifts, income tax | Nil value if yearly total is below Rs 15,000 (non-cash only) |
| Cash gifts and Diwali bonus | Fully taxable salary |
| Client and dealer gifts, TDS | 10% under Section 393 (earlier 194R) once the yearly total exceeds Rs 20,000, on the entire value, GST excluded |
| Employee gifts, GST | Up to Rs 50,000 a year is not a supply |
| ITC on gift goods | Blocked under Section 17(5)(h) |
| Gift vouchers | No GST on purchase; count toward the income tax and TDS limits |
| Cost of gifts | Deductible business expense, GST included |
Where Tax Garden Helps
Diwali gifting touches payroll, TDS and GST at once, with a Rs 15,000 threshold that can turn a small gift into a fully taxable perquisite. Getting it wrong means either employees paying avoidable tax or your business facing a TDS default and an ITC reversal.
Tax Garden's CAs help you:
- Plan employee gifts so each person stays below the Rs 15,000 yearly limit
- Maintain a per-employee gift register and report perquisites correctly in Form 130
- Compute and deposit Section 393 TDS on dealer and client gifts before they go out
- Keep blocked ITC on gift purchases out of GSTR-3B, or reverse it if already claimed
- Answer TDS and GST notices arising from festive gifting
Want this handled end to end? See our payroll outsourcing costs or talk to our team.
Source Law and References
- Income-tax Act, 2025, Section 392 (salary TDS) and Section 393 (TDS on benefits or perquisites, earlier Section 194R of the Income-tax Act, 1961)
- Income-tax Rules, 2026, perquisite valuation of gifts, vouchers and tokens
- CBDT Circular No. 12/2022 and Circular No. 18/2022 (Section 194R guidelines)
- CGST Act, 2017, Section 17(5)(h) and Schedule I, Entry 2
- CBIC Circular No. 92/11/2019-GST (free samples and gifts)
- CBIC Circular No. 243/37/2024-GST (vouchers)
Limits and rates are as of September 2026. Check incometaxindia.gov.in and cbic-gst.gov.in for later notifications before acting. This article is general information and not a substitute for professional advice.
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