Shagun, Gift Voucher or Tax Notice? The Diwali Gift Tax Rules Every Indian Should Know in 2026

Diwali gift tax rules 2026: the ₹15,000 employee limit, GST and ITC on gifts, and 10% TDS on client gifts above ₹20,000. Know before you buy.

Sneha Das

10/25/20264 min read

Every year around Diwali and Kali Puja, Kolkata's offices fill up with mishti boxes, dry fruit hampers, gift vouchers and bonus envelopes. Business owners love giving them. The tax department, unfortunately, loves counting them.

So before you place that bulk order, here is a plain-language guide to how Diwali gifts and bonuses are treated for income tax, TDS and GST in 2026, and where small businesses commonly slip.

Diwali gifts at a glance

These are the general rules. Your own facts can change the answer, so read on.

Diwali bonus: cash is always taxable

A Diwali bonus is part of salary. It is added to the employee's income and taxed at their slab rate, and you must deduct TDS on it like any other salary payment. Paying the bonus in cash instead of a gift does not make it tax-free.

A ₹15,000 gift voucher can be tax-free for an employee, while the same ₹15,000 in cash is not. That difference is why many employers now prefer vouchers or hampers.

Gifts to employees: the new ₹15,000 limit

Under the Income-tax Rules, 2026, which apply from 1 April 2026, gifts, vouchers and tokens from an employer are valued at nil if the total for the year stays below ₹15,000 per employee. Earlier, the limit was ₹5,000.

Two things to remember:

It is a yearly total, not a per-gift limit. A ₹12,000 Diwali hamper followed by a ₹4,000 New Year voucher crosses the line, even though neither looks big on its own.
Cash never qualifies. The exemption is for gifts, vouchers and tokens only.

This limit is new, so confirm the current rule with your CA before finalising your gift budget.

GST on employee gifts: the ₹50,000 line and the ITC trap

GST has its own rules, separate from income tax.

When GST applies

If the gifts you give one employee add up to more than ₹50,000 in a financial year, they are treated as a supply and GST becomes payable on their value. Below that, no GST is charged on the gift.

The ITC problem

The bigger trap for businesses is input tax credit. Under Section 17(5)(h) of the CGST Act, credit is blocked on goods given away as gifts. Sweets, beverages and food bought for employees also generally do not qualify for ITC. So if you paid 18% GST on a hamper, expect that GST to be a cost to your business.

Do not claim ITC on employee gifts in your GSTR-3B, because it is a common reason for notices later.

Gifts to clients and dealers

TDS on business gifts above ₹20,000

If you give a client, dealer or other business associate benefits worth more than ₹20,000 in a financial year, you may have to deduct TDS at 10% on the value. This rule was earlier known as Section 194R and now sits in Section 393 of the Income-tax Act, 2025. A single big gift, such as a gold coin or a smartwatch, can trigger it.

ITC and tax deduction

Gifts handed over free of cost generally attract the same ITC block. Treatment can differ where a gift is part of a contractual sales scheme, so ask your advisor before claiming credit on dealer schemes.

For income tax, gifts to clients or employees are generally allowed as a business expense when they are wholly for business purposes. Personal Diwali shopping for your family is never deductible.

What the person receiving the gift should know

If you receive gifts from non-relatives, such as friends or business contacts, and the total in a financial year goes above ₹50,000, the entire amount becomes taxable as income from other sources, not just the extra. Gifts from close relatives are exempt.

Quick checklist before Diwali and Kali Puja

Decide whether employee gifts will be a hamper, a voucher or cash, and keep each employee's yearly total below the limit.
Keep a simple register of every gift: name, date, value and purpose.
Do not claim ITC on gifts or sweets for employees.
Check each client or dealer for gifts crossing ₹20,000 in the year, because TDS may apply.
Pay festival bonuses through payroll with TDS, not in cash from the drawer.
Keep invoices and GST bills in the company's name.
Ask your CA to confirm the current limits before you place bulk orders.

Frequently asked questions

Q1. Is a Diwali gift from my employer taxable in 2026?

A: It is tax free if the total gifts and vouchers for the year stay below ₹15,000 under the Income-tax Rules, 2026. Cash and bonuses are always taxable.

Q2. Can a business claim GST input credit on Diwali gifts?

A: Generally no. Credit on gifts, sweets and food for employees is blocked.

Q3. Do gifts to customers need TDS?

A: Only when the total value of benefits to one person crosses ₹20,000 in a financial year.

Q4. Are gifts to clients a business expense?

A: Generally yes, if they are for business purposes and properly documented.

Conclusion

A warm Diwali gift should not turn into a cold tax notice. Keep your gifts within the limits, avoid cash where you can, skip ITC on gifts and document everything. A few minutes of planning now saves a lot of explaining later.

This article is for general information and is not tax advice. Limits and rules can change, so confirm them with a professional.

Need help with GST, TDS or payroll compliance before the festive season?

The Filing4u team in Kolkata helps MSMEs stay compliant all year round.