It’s finally the festive season and many salaried employees look forward to receiving gifts and bonuses from their employers, especially for Diwali. This additional payout can help individuals cover their shopping expenses for the occasion or give their savings a boost.
However, before you plan how to spend the extra money, it is important to understand its tax implications. (both cash and non-cash) are only exempt from tax when received during marriages or from specified family members.
How is Diwali cash bonus taxed?
As per the income tax law, a cash bonus received from an employer is treated as part of salary income and taxed at the employee’s applicable tax slab rate.
For example, if an employee gets a Diwali cash bonus of ₹20,000, the amount is added to their salary income for the relevant financial year and taxed accordingly. The additional payout could increase the employee’s overall tax liability, depending on their total taxable income and applicable tax slab.
When are gifts from employer tax-free?
Perquisite rules say that if the aggregate value of gifts in kind, such as electronics, is up to ₹5,000, they are considered tax-free, according to Siddharth Maurya, Founder and Managing Director at Vibhvangal Anukulara.
For example, if an employee receives an air fryer worth ₹5,000 from their employer, then it would be tax-exempt. However, if the same person receives a television or smartphone worth ₹15,000, the gift would be taxable, as its value exceeds the ₹5,000 exemption limit.
“The ₹5,000 limit is applicable for qualifying gifts in kind and the limit is on an aggregate annual basis, that is, it is not a separate for each gift or festival. Cash and cash equivalents are fully taxable as salary and employers are required to include the value of taxable gifts in their payroll and perquisite reporting,” the expert noted.
How should employees report cash bonuses in ITR?
A cash Diwali bonus should be reported as salary in income tax returns (ITR) and not as a separate tax-exempt festive payment, Maurya said, adding that employees must check their Form 16, pay slips and the tax information available on the tax department’s portal to see if the bonus is shown as salary.
If you receive a cash bonus on November 1, 2026, you must report it in your return for AY 2027-28, which covers income earned during FY 2026-27.
“Employers usually calculate and deduct (tax deducted at source) on salary and bonuses under the applicable salary withholding provisions and make the payment to the employees. Therefore, the additional payment may increase the employee’s estimated tax liability and consequently affect the TDS deducted during the relevant payroll period,” he noted.
Employees can claim tax credit for the TDS actually deducted and paid against their PAN, subject to verification of the relevant tax records. They must reconcile the amount of TDS with the forms and tax records before they file their ITR.
TDS is an advance collection of income tax. However, in certain cases, TDS may be in excess of the employee’s total income tax liability, in which case a refund may be claimed. In other cases, the TDS may be less than the employee’s total income tax liability and the employee will be required to pay the balance tax.