Diwali Bonus in Hand? Here’s How The Taxman Sees It

As Diwali bonuses are given out, employees should remember that this festive reward is fully taxable. However, since employers deduct tax at the source before payout, most employees receive the post-tax amount and need not worry about taxes. However, if you’ve switched jobs recently, you need to keep a few things in mind.

All bonuses, including the Diwali bonus paid to employees, are considered part of the salary and are included in computing the total income of the employees. They are taxed at the slab rates applicable to the employees. However, please note that all these bonuses are paid to the employees after deduction of tax, and the amounts received by the employees are generally post-tax.

“The amount of bonuses is automatically known to the employer since it is the payer of the bonus, and tax is generally deducted at the source while paying the bonuses to the employees. No further disclosure is warranted from the employees,” says SR Patnaik, partner (head - taxation), Cyril Amarchand Mangaldas.

The possibility of employees making mistakes does not arise because it is always the responsibility of the employer to deduct tax at the source while making bonus payments. However, it is possible that the employees may have switched jobs after the distribution of the bonus. “In such cases, generally the employees may miss out on disclosing the bonus while disclosing their salary from the previous employer,” says SR Patnaik, partner (head-taxation), Cyril Amarchand Mangaldas.

Not reporting the bonus amount may result in a lower tax deduction at source. Hence, employees should be wary of the same and report their income accurately to avoid any higher tax liability.

It is recommended that you spend your Diwali bonus wisely. Blowing it all away in buying luxury goods may not be a good idea. To start off with, you can use it to build an emergency fund if you do not have one.

You can also invest it.” Planning how to spend the bonus, of course, varies with the taxpayer's financial plans, but they may consider making investments that are applicable under section 80C if they follow the old tax regime; otherwise, they can consider the national pension scheme (NPS) or even generally investing in property, mutual funds, or pension/retirement schemes for their future security,” says Ritika Nayyar, partner, Singhania & Co.