It is customary for employers to give gifts to their staff, which helps in boosting employee morale and promoting a positive work environment. Gifts are often given during festivals such as Diwali, Christmas, New Year, etc taking into consideration the cultural and religious background of the employees.

Apart from festivals, employers also gift employees to celebrate work anniversaries, birthdays, significant achievements, or milestones within the company. In some instances, employers gift employees to reward them for outstanding performance. While gifts can be in the form of cash, gift cards, vouchers, or prepaid cards, the taxability of gifts would vary, depending on the specific situation.

The Income Tax law specifies that the value of any gift, or voucher, or token in lieu of such gift received by the employee or any household member on ceremonial occasions or otherwise from the employer shall be taxable as perquisite. The taxable value of such gift shall be Nil, if the value of such gift, voucher or token is below ₹5,000 in aggregate during a financial year. In essence, gifts provided to employees on ceremonial occasions or otherwise will be considered as a taxable perquisite in the hands of employees if the value of such gift exceeds ₹4,999.

Taxable as perquisite

It is important to note that if the value of gifts is ₹5,000 or more, the entire value of the gifts would be taxable as perquisite. For instance, if an employee receives two gifts from an employer in a financial year, the first gift valued at ₹4,000 and the second at ₹3,000, the entire value of the gifts amounting to ₹7,000 will be taxable as perquisite in the hands of employee. Additionally, it’s important to note that the exemption from taxation for gifts less than ₹5,000 is available regardless of the tax regime in place.

If an employee receives gifts in the form of cash from their employer, it is typically treated as part of their regular salary and is subject to taxation. In such cases, the exemption limit of ₹5,000 may not be applicable.

It is worth mentioning that the taxation rule of gifts, with the limit of ₹5,000 is typically applicable when the gifts/reward are provided to all the employees of the organisation on ceremonial occasions. However, if the employer provides gift to specific employees for appreciating any skills, expertise, good performance or for performing in any internal event, such award or winnings will be treated as emoluments received in the course of employment. Consequently, the entire value of the gift would be taxable as salary. In this case, the threshold limit of ₹5,000 applicable for gift perquisite may not be applicable.

Gifting branded products

What if companies gift their own branded products — such as apparel, sportswear, gadgets, etc, to employees? For example, let’s say a company that manufactures branded apparel decides to celebrate its 25th Anniversary by gifting all its employees company-branded T-shirts.

The question arises whether gifting of own branded products to employees will have the same tax implications. While there are arguments that gifts given for brand promotion, especially by companies in consumer-facing businesses, are non-taxable on the premise that such gifts serve the company’s business interests by promoting its branded products through employees, it is crucial to note that this scenario is not clearly provided in the income-tax law, and it requires a detailed examination of the specific facts.

Further, the value of the product being gifted in such a scenario is also an important consideration and can influence the position of taxability/non-taxability of gifts to employees.

Streamline the process

Since there are a lot of factors to be looked at before concluding the taxability of gift, it becomes important for employers to have a streamlined process to track the taxable value of gifts provided to employees on a regular basis, which will help ensure compliance with the tax rules, especially the taxes deducted at source requirement on the employee’s salary by the employer.

In summary, while gifts to employees can be a meaningful way to show appreciation, employers need to be mindful of the tax implications and the related compliance requirements to avoid any unexpected tax consequences for both employers and employees.

The writer is Tax Partner and Mobility Leader, EY India. Shanmuga Prasad – Director, EY India, contributed to the article