practical tax & investment planning online
international tax expert / colunmist / author / speaker

Perk up your Employee’s Diwali with a Tax-free Gift!

Gift Below Rs.5,000 On Ceremonial Occasion

Treated As Tax Free Perk Under I.T. Rules

“If you give what can be taken, you are not really giving,” quoted the noted Sufi author Idries. Trying to think of giving something to your employees during the coming festive season, out of which even the Taxman cannot take anything? Here is a smart idea!

Tax Free Gift on Ceremonial Occasion

Rule 3(7)(iv) of the Income-tax Rules relating to valuation of perquisites provides that, “the value of any gift, or voucher, or token in lieu of which such gift may be received by the employee or by member of his household on ceremonial occasions or otherwise from the employer, who is not liable to pay Fringe Benefit Tax (FBT) shall be determined as the sum equal to the amount of such gift. However, where the value of such gift, voucher or token, as the case may be, is below Rs.5,000 in the aggregate during the previous year, the value of perquisite shall be taken as nil.”

In the FBT regime, the employer had to bear the liability of paying FBT on 50% of the value of any gifts given by him to the employee. Thus, the effective tax burden, considering the 30% tax rate in case of the employer being a firm or company, worked out to 15%. With the abolition of FBT from 1st April, 2009, the tax liability on the value of such gifts as per the above rule has now shifted in the case of the employee, to be borne by him at his applicable marginal rate.

What kind of Gift is tax free?

However, the good news is that if the value of such gift, or voucher, or token in lieu of which such gift may be received by the employee or a member of his household from the employer, on any ceremonial occasion during the year, is below Rs.5,000 (in the aggregate during the relevant financial year), the same would be exempt from tax.

Thus a gift of gold or silver coin or a household article, or even a gift voucher or token against which any article can be purchased, within the monetary value of Rs.5,000 can be given tax-free to your employee the coming Diwali. Obviously, what you spend in this regard is fully tax deductible as business expenditure in your hands as an employer, fortunately not attracting even any FBT now.

Make it part of CTC

What an employer considers while structuring the pay packet of his employee is the net cost to the company (CTC). Ask your employee to accept this gift or voucher or token as part of his CTC and if he is in the top 30.9% tax bracket, he would be more than glad to do so, because he would reap a cool tax saving of around Rs.1,500. Make his Diwali more enjoyable in a manner even the Taxman would not mind!

Leave a Reply

Powered by