Festivals in India aren’t just about celebrations; they often bring financial rewards too. One of the most anticipated perks for employees during this time is the Diwali bonus, a traditional financial incentive offered by many companies. While receiving this bonus feels rewarding, it’s equally important to understand how it impacts your tax obligations. In this blog, we will explore the taxability of bonuses in India and important considerations employees should keep in mind when receiving this festive perk.
What is a Diwali Bonus?
A Diwali bonus is a financial gesture extended by companies to their employees, acknowledging their dedication and hard work. The bonus amount can vary depending on company policies, financial conditions, and the employee’s role. Typically, private companies use this opportunity to motivate their employees, offering either a fixed Diwali bonus or percentage of salary or a lump sum amount.
However, the key question remains: Is bonus taxable in India?
Taxability of Bonus
Yes, Diwali bonuses are taxable in India. According to tax regulations, any income an employee earns, including bonuses, is taxable under the “Income from Salaries” category. Here’s how bonus is taxed in India:
- Bonus is Part of Your Salary: Any bonus, including a Diwali bonus or a performance bonus, forms part of your gross salary and is taxed under your salary income.
- Tax Slabs in India: The tax applicable to your Diwali bonus depends on your income tax slab. The tax rates in India range from 5% to 30%. The Diwali bonus gets added to your annual salary, and your total income is taxed as per the applicable slab. For instance, if you are in the 30% tax slab, your bonus will be taxed at 30%, plus applicable cess.
- Tax Deducted at Source (TDS): Companies generally deduct Tax Deducted at Source (TDS) on Diwali bonuses. Your company will calculate the total earnings (salary + bonus) and deduct the appropriate tax before disbursing the bonus. If insufficient TDS is deducted, the employee must pay the remaining tax when filing the Income Tax Return (ITR).
Diwali Bonus Calculation for Private Companies
Diwali Bonus Calculation for Private Companies: Many private companies follow different methods to calculate the Diwali bonus:
- A fixed Diwali bonus percentage of the basic salary (e.g., 8.33% or 20%).
- A performance-based bonus is tied to the employee’s contributions or the company’s overall profitability.
Taxability of Bonus Shares
Is Bonus Taxable in India? Yes, all bonuses, including Diwali bonuses and bonus shares, are taxable. Even smaller bonus amounts must be declared in your ITR and taxed as per the applicable slab.
Some companies may issue taxability bonus shares instead of cash bonuses. While the issuance of bonus shares is not immediately taxable, selling these shares later could attract capital gains tax.
Important Considerations for Employees
When receiving a Diwali bonus, it’s essential to keep these points in mind:
- Check Your Tax Bracket: If you are close to a higher income tax bracket, a substantial Diwali bonus could push you into the next slab, resulting in higher taxes. It’s crucial to understand how the bonus impacts your total income.
- Plan Your Taxes: You can plan for your bonus tax liability by investing in tax-saving instruments like the Public Provident Fund (PPF), National Pension Scheme (NPS), tax-saving fixed deposits, and Equity-Linked Savings Schemes (ELSS). These options can reduce your taxable income, helping you retain more of your bonus.
- Diwali Bonus Rules for Private Companies: While not mandated by the government, the Payment of Bonus Act, 1965, requires companies with over 20 employees to pay at least 8.33% of basic salary as a bonus if certain conditions are met. The final bonus percentage depends on the company’s policies and performance.
Using a Tax Bonus Calculator
To determine your exact tax liability on the Diwali bonus, you can use an online tax bonus calculator. These calculators are easy to use and help you understand how much tax you owe based on your total income, including the Diwali bonus.
Conclusion
Receiving a Diwali bonus is exciting, but it’s essential to understand the taxability of the bonus to manage your finances better. Since bonuses are fully taxable, you should be aware of your tax obligations and make the best use of available tax-saving options. By planning strategically, you can maximise your post-tax bonus and enjoy the festive season with peace of mind.
At ApkiReturn, we can assist you with any tax-related queries or concerns. Feel free to reach out to us for advice on how to optimise your tax planning, including managing the tax on your Diwali bonus.
Stay compliant, and enjoy your Diwali bonus without tax worries!
Need further assistance or have questions? Feel free to reach out to us at +91 766 515 6000 or info@apkireturn.com. At ApkiReturn, we ensure that your tax is as seamless and beneficial as possible.
