Gifts and Perquisites to Employees

A Diwali hamper, a phone the employee keeps, a gold coin for ten years’ service, a company car under the appointment letter, club membership, health cover. Each of these reaches an employee, and GST treats them in three different ways. A benefit given under the employment contract is not a supply at all. A gift outside the contract is not a supply while it stays within Rs 50,000 in a financial year. Above that line it is a supply between related persons, taxed even though the employee pays nothing. The input tax credit side does not follow the same lines. Credit on goods given as gifts is blocked whatever their value. Credit on food, health insurance, club membership and leave travel is blocked unless a law obliges the employer to provide them.

This guide sets out each rule as it stands on 23 October 2026, and then how the employer documents, reports and pays where tax is due. The concepts of supply and value are covered in Supply: the Event GST Taxes and Value of Supply.

Why a free item can be a supply: employer and employee are related persons

Section 7(1)(c) makes the activities in Schedule I a supply “made or agreed to be made without a consideration”. Paragraph 2 of Schedule I covers:

“Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business”

The Explanation to section 15 deems persons to be related persons if “such persons are employer and employee” (clause (a)(iii)). So anything an employer supplies to an employee in the course of business can be a supply even when nothing is charged. Two carve-outs keep most workplace benefits out.

First carve-out: perquisites under the employment contract

Paragraph 1 of Schedule III lists “Services by an employee to the employer in the course of or in relation to his employment” as neither a supply of goods nor a supply of services. CBIC applied that to the other side of the bargain in Circular No. 172/04/2022-GST of 6 July 2022 (item 5). Perquisites provided “in terms of contractual agreement entered into between the employer and the employee are in lieu of the services provided by employee to the employer in relation to his employment”, and so they “will not be subjected to GST when the same are provided in terms of the contract between the employer and employee”.

The test is the contract. A car, accommodation, a meal benefit or insurance cover that the appointment letter, the employment agreement or a policy forming part of the terms of employment provides is a perquisite. The same item handed out at the employer’s discretion is a gift.

Circular No. 213/07/2024-GST of 26 June 2024 applies the same reasoning to employee share plans. Where a foreign holding company allots its shares to employees of the Indian subsidiary as part of their compensation under the employment terms, GST is not leviable on that compensation. The subsidiary’s reimbursement to the parent at cost is not an import of services, because shares are securities, which are neither goods nor services. Any “additional fee, markup, or commission” the parent charges is consideration for a service of facilitating the share transaction. The Indian subsidiary pays tax on that amount under reverse charge (GST on Import of Services).

Second carve-out: gifts up to Rs 50,000 a year

The proviso to paragraph 2 of Schedule I reads:

“Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.”

Four points follow from the words.

• Per employee, per financial year. The limit is measured against what one employer gives one employee between April and March.
• Goods or services. The proviso covers gifts of either. A gifted holiday package is within it as much as a watch.
• “Gift” is not defined in the Act. In ordinary usage a gift is given voluntarily, without consideration and without a contractual obligation. That is what separates it from a perquisite under the first carve-out.
• What happens above the limit. The proviso excludes gifts “not exceeding” Rs 50,000. It does not say that only the excess becomes a supply once that figure is crossed, and no circular on CBIC’s list addresses that point. Where the year’s gifts to an employee exceed the limit, they fall back under paragraph 2 as a supply between related persons.

Valuing a gift above the limit

Transaction value under section 15(1) applies only where the parties “are not related and the price is the sole consideration”. Neither condition holds for a gift to an employee, so section 15(4) sends the value to the rules. Rule 28(1) values a supply between related persons:

• (a) at the open market value of the supply;
• (b) if that is not available, at the value of a supply of goods or services of like kind and quality;
• (c) failing both, under rule 30 (cost plus ten per cent) or rule 31 (residual method), in that order.

The second proviso to rule 28(1), which deems the invoice value to be the open market value where the recipient is eligible for full credit, does not help. An employee receiving a gift is not a registered person taking credit.

The rate is the rate for the goods or services gifted.

Credit on what is given away

The input side is governed by section 17(5), and two clauses matter here.

Clause (h): gifts. Credit is not available on “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”. The clause refers to goods, and it does not depend on the Rs 50,000 limit. So an employer that buys watches to give away cannot take credit on them, and if the year’s gifts to an employee cross Rs 50,000, it also pays output tax on them. Where credit was taken when the goods were bought, and they are later given away, the credit is reversed. The existing guide Blocked Credits covers clause (h) in general.

Clause (b): employee benefits. Credit is blocked on:

• (i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft (except when used for the purposes in clause (a) or (aa)), life insurance and health insurance;
• (ii) membership of a club, health and fitness centre; and
• (iii) “travel benefits extended to employees on vacation such as leave or home travel concession”.

The proviso at the end of clause (b) allows credit “where it is obligatory for an employer to provide the same to its employees under any law for the time being in force”. Circular No. 172/04/2022-GST (item 3) clarified that this proviso applies to the whole of clause (b), not only to sub-clause (iii). A canteen that a factories law requires, or insurance a statute requires, therefore carries credit. The same facility provided only because the employment contract promises it does not. The contract decides that no output tax is due on the benefit; it does not unblock the credit.

Clause (g): personal consumption. Credit is also blocked on “goods or services or both used for personal consumption”. This catches purchases made for an individual rather than for the business.

What the employer needs before reporting

Item	Where it comes from
A list of gifts per employee for the financial year, with value	Books (gift register, payroll or HR records)
The employment terms that make a benefit a perquisite	HR records: appointment letters, policies
Purchase invoices for gifted goods, and whether credit was taken	Books and GSTR-2B on the portal
Open market value, or the value of like goods, for gifts above the limit	Purchase invoices, price lists
Credit taken on items now blocked under section 17(5)	Books and earlier GSTR-3B returns
Laws that oblige the employer to provide a benefit (for the clause (b) proviso)	Legal or compliance records

Documents, returns and when tax falls due

The invoice. A gift above the limit is a taxable supply, so section 31 requires a tax invoice with the particulars in rule 46. For goods, the invoice is due before or at the time of removal or delivery. For services, rule 47 allows thirty days from the supply. The employee is unregistered, so the invoice is a business-to-consumer (B2C) invoice.

Time of supply. Under section 12(2) for goods and section 13(2) for services, tax falls due on the date of the invoice, or the last date by which it should have been issued. No payment is received, so the payment limb does not arise. The detail is in Time of Supply.

GSTR-1. The supply is reported as a supply to an unregistered person: in table 7 (B2C others, consolidated by rate) or, for an inter-State invoice above Rs 1 lakh, in table 5 (B2C large). It is also reported in the HSN summary in table 12 and the documents count in table 13 (Filing GSTR-1). Section 37 fixes the 10th of the following month. Notification No. 83/2020-Central Tax extends this to the 11th for monthly filers and to the 13th after the quarter for QRMP filers (The GST Returns Calendar).

GSTR-3B. The tax appears in table 3.1(a). The GST portal’s user manual describes this table as auto-drafted from GSTR-1, editable in the return. Credit to be reversed on gifted goods, and blocked credit under section 17(5), goes in table 4(B)(1), which the portal’s manual describes as the row for reversals “As per rules 38, 42 and 43 of CGST Rules and Section 17(5)”. Rule 61 fixes the due date at the 20th of the following month for monthly filers. For quarterly (QRMP) filers it is the 22nd or 24th of the month after the quarter, depending on the State. The steps on the portal are covered in Filing GSTR-3B and Paying the Tax and Reporting ITC in GSTR-3B Table 4.

Signing. Rule 26 requires a company to verify returns with a digital signature certificate (DSC). Other registered persons may also use an electronic verification code (EVC). The invoice itself is signed or digitally signed by the supplier or its authorised representative under rule 46.

Interest and penalty

Tax not paid by the due date carries interest under section 50(1) at 18 per cent a year (Notification No. 13/2017-Central Tax), from the day after the due date until payment. Credit wrongly availed and utilised, for example credit on gifted goods that was never reversed, carries interest at 18 per cent under section 50(3). Unpaid tax and wrongly availed credit are recovered through the demand provisions (GST Notices: DRC-01A and DRC-01). A missed invoice can also draw a penalty under section 122.

Correcting it later

An omitted gift is added in a later GSTR-1, and its tax paid in a later GSTR-3B with interest. A credit reversal missed in one month is made in a later one. Section 39(9) allows corrections to a return only until 30 November after the end of the financial year, or the filing of the annual return if earlier. After that, a missed liability is paid through FORM GST DRC-03. The options are in Correcting Mistakes in Returns.

The sequence for an employer

1. Sort each benefit into one of three groups: a perquisite under the employment terms, a gift, or a purchase for personal consumption.
2. For perquisites, record the contractual source. No output tax is due (Schedule III para 1; Circular No. 172/04/2022-GST).
3. Total gifts per employee for the financial year. Up to Rs 50,000, they are not a supply.
4. For gifts above the limit, value them under rule 28, issue a tax invoice, and report them in GSTR-1 (table 7 or 5) and GSTR-3B (table 3.1(a)).
5. Do not take credit on goods bought to be given as gifts (section 17(5)(h)). Reverse it in table 4(B)(1) if it was taken.
6. Check credit on food, health insurance, club membership and leave travel against section 17(5)(b). It is available only where a law requires the employer to provide them.
7. Pay any tax missed with interest under section 50, and make corrections within the section 39(9) time limit.

The next guide in this set covers Selling Used Vehicles and Old Business Assets.