Applicable TDS Provisions on Diwali Gifting to Employees, Suppliers or Customers – Understanding TDS/Withholding tax provisions
With Diwali approaching, many businesses plan to extend goodwill by offering gifts, hampers, travel packages, loyalty rewards or other benefits to employees, suppliers, dealers or customers. While such gestures strengthen relationships, they may also trigger tax deduction at source (TDS) under Income Tax Provisions.
Below is a practical guide to help you understand when TDS applies and when it does not.
Applicable Income Tax Provisions:
- Who is covered?
Any person (company, partnership, firm, LLP, individual or HUF) who is providing a benefit or perquisite (monetary or non-monetary) to a resident in the course of carrying on business or profession. - Rate of deduction:
10% of the value of the benefit/perquisite. - Nature of benefit:
Withholding tax applies irrespective of whether the benefit/perquisite is of capital or revenue nature. - Timing:
TDS must be deducted before providing the benefit/perquisite. Where the benefit is wholly in kind or partly in cash and partly in kind, the provider must ensure that tax has been paid before release.
Exemptions / Non-applicability
Withholding tax provisions does not apply in the following cases:
- De minimis threshold: If the total value of benefit or perquisite provided to a recipient does not exceed ₹20,000 in a financial year.
- Small deductors: If the deductor is an individual or HUF whose turnover in the preceding FY does not exceed
- ₹1 crore (business), or
- ₹50 lakh (profession).
- Pure agent transactions: Expenses incurred by a service provider on behalf of the service recipient, where the provider only facilitates payment and does not retain the benefit.
- Business/dealer conferences:
- Expenditure on training or educational conferences meant to update dealers/customers about products/services, where the benefit cannot be attributed to an individual participant, will not attract TDS.
- However, if the event is in the nature of a leisure trip, incentive tour, or extended to family members, TDS will apply.
- If the expenditure on stay/food is provided before or after the conference and is not allocable to particular participants, it may escape TDS but may be disallowed as business expense.
- Corporate actions: Issue of bonus shares or right shares to shareholders of a public company.
- Trade incentives: No TDS on sale discounts, cash discounts or rebates offered in the ordinary course of sales
Valuation of Benefit/Perquisite
- The value for TDS purposes is generally the cost to the provider of the benefit/perquisite.
- If the provider manufactures or supplies the product itself, the value should be taken as the price it normally charges to customers.
- GST component, if recovered separately, should also be considered for valuation (as per CBDT guidelines).
Key Takeaways for This Festive Season
- Track the value per recipient to ensure the ₹20,000 threshold is not crossed unknowingly.
- Obtain PAN of the recipient to avoid higher TDS under section 206AA.
- Gross up the benefit value where tax cannot be recovered from the recipient.
- Document the nature of conference/meeting and maintain evidence to support “educational” nature.
- Remember, even non-monetary benefits (like free samples, gift vouchers, sponsored trips) can trigger TDS.
Conclusion: Before you gift, sponsor a trip, or give away freebies this Diwali, check whether withholding tax provision applies. Proper tax compliance now can save you from disallowance or penalties later.