Bonus Taxation: How are Bonus Taxable?

Salary being credited, employees paying tax to the government and availing tax exemptions happens every financial year. As we all know, tax is levied on the total gross income an individual earns.

Total gross income is not just the salary being earned, but also includes other modes of income like incentives, festive bonus and much more. Every financial transaction being recorded, it is mandatory to pay your taxes accordingly.

Now a big question to ponder over is that, whether the additional bonus that you receive are taxable? This article contains answers on bonus taxation and how it is done.

Table of contents:

1. What is bonus?
2. Types of bonus
3. Are bonus taxable?
4. Gift as bonus
5. How are bonues taxable?
6. When is bonus taxable?
7. Bonus taxation exemption

What is bonus?

A reward or recognition given to an employee is usually done by awarding them with bonus or incentives. So bonus is the additional payment that is credited to an individual apart from their normal paycheck.

Not just on the basis of performance, bonuses are also given in the occasion of any festive or holiday. It needn’t be as cash, in some cases bonuses can also be offered as stocks, referrals, gifts, etc.

Types of bonus

Since bonuses are rewarded for different reasons, they are categorized into different types:

1. Incentive bonus: These bonuses are given to the employee for their work and performance towards the company. They are subdivided into three types, 

    a) Signing bonus: This is generally given to top candidates of the company to accept a promotion, to make them stay in the company for a longer period of time. 
    b) Referral bonus: This is awarded when an employee refers a good candidate to the company. 
    c) Retention bonus: Retention bonus is usually given to an employee to appreciate their efforts and loyalty towards the company. 

2. Holiday bonus: As the name suggests this is generally give on special festive occasions. These bonuses are given in the form of cash or gift and entirely depends on how the company wants to share it with their employees. 

3. Performance bonus: This type of bonus is entirely regarded as an award or recognition that is given to an employee for their work. When an individual brings high profit to the company, then they are awarded with performance bonuses. 

Gift as bonus

Festive or any kind of celebration is always accompanied with gifts. These gifts are given in multiple ways, and we always wonder if the gifts received are taxable or not. Points to remember on tax related to gifts,

• Monetary gift, is a sum of amount received as gift which is taxable along with the income credited. 
• Movable properties are of two categories, 
    ◦ Movable gifts at reduced price, which needn’t be taken into consideration. 
    ◦ Specified movable gifts, this needs to be taxed. 
• Immovable properties are not taxable if the stamp paper value is less than Rs. 50,000

Are bonus taxable?

Once any mode of cash is credited under your gross total income it is taxable. So, the bonuses that you receive on certain occasions from your company is taxable for every financial year. When bonuses are received in the form of gifts, then no tax will be imposed.

The cash that is being credited in terms of bonus is taxable based on the income tax slab rates. Though it is an additional mode of income or pay, no exemption of tax is provided by the government of India.

How are bonuses taxed?

Generally any kind of bonus that is being rewarded is taxed under the Income tax Act of India. It is because, once they are added to your gross income they are automatically taxable.

If the bonus is credit in the form of cash, it is considered as an additional. Which means, the bonus is also covered under the income of an individual. If the bonus, and salary exceeds the usual slab rate, then tax should be paid according to the slab rate of the income.

In case of gifts, in most cases if the worth is below Rs. 4000 there isn’t any necessary to pay income tax. But if exceeds the limit, then it comes under taxable goods. So it is always important to have a copy of the gift bills, to file the income tax.

When is bonus taxable?

Bonuses are taxable only when it is received by the individual. Your company may declare the bonus in the present year, but it will be credited in the following year. Then it is taxable in the next financial year.

This can happen in two cases,

a. When the employer declares Rs. 25000 on 15th March 2022, and the amount is credited on 25th April 2022. In this case, the tax will be levied in the financial year 2022-2023. 

b. When the employer declared a bonus on 15th March 2022, but doesn’t mention the amount. Later a bonus of Rs.25000 is credited on 25th April 2022. In this case, the tax will be levied on in the financial year 2023-2024. 

Bonus taxation exemption

Its not at all times, that bonus is taxable for income tax. When the bonus received falls under the following category, then it is exempted.

• Monetary gift when received from family members like parents, siblings and grandparents. 
• Monetary gift for HUF’s are not taxable. 
• When the gift is received on the occasion of marriage. 
• Amount or property received as inheritance from family. 
• Any sum of amount that is received on account of death of a person. 
• Fund that is received from any organizations, foundation, university or institutes.

TDS on bonus

TDS is deducted from the gross salary, based on the salary that is credited to the individual. When bonus is added to the salary, the TDS deduction varies based on the bonus amount.

So the calculation also varies. Here is an example of how TDS deduction works before and after addition of bonus.

There are certain circumstances when the slab rate of bonus and salary change, when the bonus exceeds the limit. Then an additional amount has to be paid according to the new slab rate.

Ways to save tax on bonus

The concept of bonus is always better if tax isn’t levied on the amount that is credited. So to obtain tax exemptions, there are few ways where the individuals can make investments and can avail the exemptions.

Here are a few ideas to make investments with the bonus received:

Life and health insurance: Under section 80C an individual can get a deduction up to Rs. 1.5 lakhs for premium paid under life insurance. Similarly under Section 80D, Rs. 25,000 can be deducted for health insurance.

PPF: This is a savings scheme that is offered by the central government. When an individual invests Rs. 1.5 lakhs under PPF scheme then the income tax department allows an exemption.

ELSS: This means Equity Linked Service Scheme which is utilized by companies and organizations. Similar to PPT, this also allows a deduction of about Rs. 1.5 lakhs.

Donation: Donations are always accompanied with 100% tax exemption in case of any charitable cause. If the money is donated for any educational institute or NGO then you can avail an exemption of about 50%.

Conclusion

Receiving gifts or being awarded with bonus for their excellence are some factors that promote the work life of the employees. Since the received bonus is being taxed, the employees need to be careful when and how it is being given to them.

When the bonus increases the net salary, then there are high chances for the slab rates to increase as well. Whatever may be the case, the conclusion is that all bonuses that are received on an official note are taxable.

Gifts and money received from family members aren't included, until it crosses the limit. In case an employer wants to enjoy an exemption in bonus taxes, then investments are really helpful.