Diwali Gifts to Dealers and Clients: TDS Above ₹20,000 and No GST Credit
Gifts and benefits to a dealer or client above ₹20,000 in a year attract 10% TDS, earlier under Section 194R and now in Section 393 of the Income-tax Act, 2025. Under GST, input tax credit on goods given as gifts is blocked. Gifts to employees follow separate salary rules.
Diwali is when manufacturers and distributors send gifts to dealers, retailers and clients: sweets, silver coins, appliances, even trips. Two tax rules apply that many businesses forget.
TDS on benefits to business associates
Since 2022, a person giving a benefit or perquisite to a resident in connection with that person's business or profession must deduct 10% TDS if the year's total to that person exceeds ₹20,000. This was Section 194R. Under the Income-tax Act, 2025, from 1 April 2026, it sits in the Section 393 TDS table.
It applies to gifts in kind, free trips, sponsored events and the like. It does not apply to individuals or HUFs giving gifts if their turnover is below the audit limit.
How to deduct TDS on a gift in kind
There is no cash to deduct from. You can:
- ✓ask the recipient to pay the TDS amount to you before you hand over the gift; or
- ✓pay the TDS yourself as an extra cost, which is then itself a benefit (some businesses gross it up).
Either way, deposit the TDS and report it in the quarterly TDS return.
GST: no credit on gifts
Input tax credit is blocked on goods given away as gifts or free samples (Section 17(5)(h) of the CGST Act). If you claimed credit when buying the gifts, reverse it.
Gifts given as part of a scheme tied to sales, such as "buy 100 cartons, get a TV", are different. They may be treated as part of the supply and the credit may be allowed. Check the scheme terms with your CA.
A worked example
A Surat textile wholesaler gives 30 retailers a Diwali hamper worth ₹8,000 and a trip worth ₹25,000 to its top 5.
| Recipient | Value in the year | TDS at 10% | GST credit on cost |
|---|---|---|---|
| 25 retailers with hamper only | ₹8,000 | None (below ₹20,000) | Blocked |
| 5 top retailers (hamper + trip) | ₹33,000 | ₹3,300 each | Blocked on hamper; check trip services |
A checklist
- List every business recipient and the total value of gifts and benefits for the year.
- Deduct TDS where the total exceeds ₹20,000.
- Do not claim GST credit on goods bought as gifts.
- Treat scheme-based incentives separately, with documented terms.
- Keep invoices and recipient lists.
Frequently asked questions
Are gifts to employees covered by this rule?
No. Employee gifts are part of salary rules, tax-free up to ₹15,000 a year.
Do we deduct TDS on discounts?
Ordinary sales discounts are not benefits for this rule.
Is the gift a deductible business expense?
Generally yes, if given for business purposes and recorded properly.
Sources
- ✓Section 194R TDS on benefits, Bajaj Finserv
- ✓Diwali gifts to employees and clients: tax and GST rules 2026, TaxGarden
- ✓Section 393 of the Income-tax Act, 2025, India Briefing
This is a summary, not tax advice. Confirm with your chartered accountant.
Written by
Founder, Airwix Technologies (Sleet)
Vatsal Sutariya is the founder of Airwix Technologies in Ahmedabad, the company that builds Sleet: SleetHR for HR and payroll, and Sleet Accounting for GST billing and books. He writes about GST, invoicing, business tax and choosing software for Indian businesses, and checks each rule against the official notification before it is published.
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