Last updated: 25 October 2026. Diwali gifts to your employees are not a supply under GST as long as each employee's gifts stay within ₹50,000 in the financial year (proviso to paragraph 2 of Schedule I). Gifts to customers, dealers and business contacts carry no output GST either, but Section 17(5)(h) blocks the input tax credit on goods you give away as gifts or free samples, so the GST you paid on them becomes a cost.
Applicability Note: This guide is based on GST provisions applicable as of 25 October 2026, re-checked against CBIC's repository and the GST portal that day. Always verify the current position on gst.gov.in or with a GST professional before taking action.
Who Should Care?
This guide applies to:
- Employers planning Diwali gifts, hampers or vouchers for staff
- Businesses sending gifts to customers, dealers, distributors or vendors
- Manufacturers and pharma companies that hand out free samples
- Retailers running festive "buy one get one" or "free gift with purchase" offers
1. Two Questions to Ask About Every Gift
- Is the gift a supply, so you owe output tax on it? Under Section 7(1)(a) of the CGST Act, a supply normally needs consideration. Something given free is a supply only if it is listed in Schedule I, which Section 7(1)(c) brings in even where it is "made or agreed to be made without a consideration".
- Can you keep the input tax credit on what you bought to give away? Section 17(5)(h) says no credit is available on goods "lost, stolen, destroyed, written off or disposed of by way of gift or free samples". That clause has not been amended since 2017.
For most Diwali gifts the answer is "no output tax, no credit".
2. Gifts to Employees: The ₹50,000 Limit
Employer and employee are "related persons" under clause (a)(iii) of the Explanation to Section 15. Paragraph 2 of Schedule I treats a supply between related persons in the course of business as a supply even without consideration. Its proviso then carves out employee gifts:
"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." (Schedule I, paragraph 2)
So a ₹15,000 watch for an employee is not a supply, as long as that employee's gifts for the year stay within the limit.
What happens above ₹50,000
The proviso's own words cover only gifts "not exceeding" ₹50,000 in a financial year. CBIC's press release on gifts and perquisites of 10 July 2017 reads it the same way: gifts "upto a value of Rs 50,000/- per year by an employer to his employee are outside the ambit of GST. However, gifts of value more than Rs 50,000/- made without consideration are subject to GST, when made in the course or furtherance of business". On that reading the limit is per employee per year, and once it is crossed the gift is a supply at its full value.
A press release has no legal force, and some commentary takes the view that only the amount above ₹50,000 is taxable. We have not found a circular or ruling supporting that view. Keep a per-employee record of gifts for the year.
Where a gift does become a supply, it is valued under Rule 28(1): open market value first, then the value of goods of like kind and quality, then Rule 30 or Rule 31, in that order. The second proviso to Rule 28(1), under which invoice value counts as open market value, does not help here because it needs a recipient eligible for full input tax credit, and an employee is not one.
What counts as a gift
GST law does not define "gift". The 2017 press release describes it as given without consideration, voluntarily and occasionally, and something that "cannot be demanded as a matter of right". Circular No. 172/04/2022-GST dated 6 July 2022 (S. No. 5) clarifies that perquisites given "in terms of contractual agreement" between employer and employee are not subject to GST. That covers benefits in the employment contract, not a discretionary festival gift.
Cash and vouchers
A cash gift or Diwali bonus is not a supply at all, because money is excluded from both "goods" and "services" under Sections 2(52) and 2(102).
Gift cards work the same way in practice. Circular No. 243/37/2024-GST dated 31 December 2024 clarifies that transactions in vouchers are neither a supply of goods nor a supply of services, whether or not the voucher is an RBI-recognised prepaid instrument. GST falls on whatever the employee buys when redeeming it.
Credit on employee gifts
Within the ₹50,000 limit the gift is not a supply, so Section 17(5)(h) applies and the credit on gifted goods is blocked. Above the limit, CBIC's position in Circular No. 92/11/2019-GST dated 7 March 2019, para 2(A)(ii), is that where distribution of gifts falls within Schedule I as a supply, "the supplier would be eligible to avail of the ITC". Clause (h) itself contains no such exception, and a circular binds the department rather than a court, so treat this as the department's stated view.
3. Gifts to Customers, Dealers and Business Contacts
A customer or dealer is normally not a related person, so a free gift to them falls outside Schedule I and is not a supply. No output tax. But the credit goes:
"it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration." (Circular No. 92/11/2019-GST dated 7 March 2019, para 2(A)(ii))
Note the circular's reach: it denies credit on input services and capital goods used for the gifts, not only on the gifted goods, which is all clause (h) names.
The Madras High Court applied the block to promotional gifts in M/s. ARS Steels and Alloy International Private Limited v. The State Tax Officer (W.P. Nos. 31, 33 and 35 of 2022, order dated 24 October 2024). Credit on gold coins and T-shirts bought for distribution to dealers as sales promotion was denied under Section 17(5)(h).
Gifts to related companies, or to your own branches in other States (distinct persons under Section 25), are different. They are Schedule I paragraph 2 supplies with no ₹50,000 carve-out, valued under Rule 28.
Services you give away, such as a hotel stay or trip for a top dealer, are harder to call. Clause (h) speaks only of goods, so whether the credit is blocked depends on the facts and on other clauses of Section 17(5). Take advice before claiming it.
4. Free Samples, and the 57th Council's Recommendation
Circular 92, para 2(A)(i), names the pharma practice of giving drug samples to stockists, dealers and doctors, and clarifies that samples supplied free of cost are not a supply unless Schedule I applies. The credit on them is blocked by Section 17(5)(h), on the same reasoning as gifts.
That may change. On 8 October 2026, the 57th GST Council recommended amending Section 17(5) "to remove the restrictions on availment of ITC inter-alia on the supplies of outdoor catering, health and life insurance, telecommunication towers, pipelines laid outside factory premises, free samples, goods destroyed or written off on expiry of shelf life as required by law" (PIB release dated 8 October 2026, para 9).
This is a recommendation only. It needs an amendment to the CGST Act and a commencement date before it changes anything. As of 25 October 2026, clause (h) on CBIC's repository is unchanged, so credit on free samples given this Diwali stays blocked. The release does not name gifts. See our 57th Council summary.
5. Buy One Get One and "Free With Purchase" Offers
Festive offers are not gifts. Circular 92, para 2(B), says a "buy one, get one free" offer "is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply". The supply is taxed as a composite or mixed supply under Section 8, and the supplier keeps the credit on the inputs, input services and capital goods used for it (para 2(B)(iii)).
6. Sweets, Dry Fruits and Food Hampers
Food has a second block. Section 17(5)(b)(i) denies credit on food and beverages unless they are used for an outward taxable supply of the same category, or as part of a taxable composite or mixed supply. The proviso after sub-clause (iii) allows credit where the law obliges the employer to provide them, and Circular No. 172/04/2022-GST dated 6 July 2022 (S. No. 3) clarifies that this proviso applies to the whole of clause (b).
A box of sweets for staff or clients is not something any law obliges you to provide, so clause (b) is likely to block the credit even where Circular 92's Schedule I route would otherwise allow it, unless the gift itself counts as an outward taxable supply of the same category, a point no circular addresses. Circular 92 speaks only to clause (h).
7. Gifting Your Own Business Assets
Giving a staff member the old office laptop is different from buying a gift. Paragraph 1 of Schedule I treats the "permanent transfer or disposal of business assets where input tax credit has been availed on such assets" as a supply even without consideration. The ₹50,000 proviso belongs to paragraph 2 only, so it does not cover this, even for an employee.
For capital goods on which you took credit, Section 18(6) sets the amount payable: the credit taken reduced by the prescribed percentage points, or tax on the transaction value, whichever is higher. Our guide to selling capital assets works through the calculation.
8. CSR Gifts
If the gifts are part of your company's corporate social responsibility spending under Section 135 of the Companies Act, 2013, Section 17(5)(fa) blocks the credit on goods and services used for those obligations. The clause applies from 1 October 2023 (Notification No. 28/2023-Central Tax dated 31 July 2023).
9. Quick Reference Table
| Gift | Output GST? | Input tax credit? | Basis |
|---|---|---|---|
| Employee gifts up to ₹50,000 in the financial year | No, not a supply | Blocked on gifted goods | Schedule I para 2 proviso; Sec 17(5)(h) |
| Employee gifts above ₹50,000 | Yes, on CBIC's 2017 reading of the full value; valued under Rule 28 | Available per CBIC (Circular 92 para 2(A)(ii)), except food (Sec 17(5)(b)) | Schedule I para 2; press release 10 July 2017 |
| Contractual perquisites | No | Depends on the item | Circular 172/04/2022-GST, S. No. 5 |
| Cash gift or bonus | No, money is not goods or services | Not applicable | Sec 2(52), 2(102) |
| Gift vouchers | No GST on the voucher itself | Not applicable to the voucher | Circular 243/37/2024-GST |
| Gifts to customers or dealers | No | Blocked | Sec 17(5)(h); Circular 92 para 2(A) |
| Free samples | No, unless Schedule I applies | Blocked (Council recommended lifting it; not yet law) | Sec 17(5)(h); PIB 8 Oct 2026 para 9 |
| Buy one get one free | Yes, as one composite or mixed supply | Available | Circular 92 para 2(B) |
| Sweets and food hampers | Follows the rows above | Blocked unless legally obliged or used for a same-category taxable supply | Sec 17(5)(b)(i); Circular 172 S. No. 3 |
| Used business asset given away | Yes, if credit was taken on it | Pay the higher amount under Sec 18(6) (capital goods) | Schedule I para 1; Sec 18(6) |
10. Reporting the Blocked Credit in GSTR-3B
GSTR-3B Table 4(A) auto-populates the credit GSTR-2B shows as available, including credit that Section 17(5) makes ineligible. Credit on goods bought as gifts or samples is ineligible under Section 17(5) and goes in Table 4(B)(1), the table for permanent reversals. Circular No. 170/02/2022-GST dated 6 July 2022 (paras 4.3(B) and 4.4) says reversal of ineligible credit under Section 17(5) "is required to be made under Table 4(B) and not under Table 4(D)". If you claimed credit on stock you later give away, reverse that credit through the same table. Our GSTR-3B Table 4 guide explains each row.
Book festival gifts under a separate purchase head from trading stock, so the reversal is easy to trace.
Key Takeaways
- Employee gifts within ₹50,000 per employee in the financial year are not a supply (Schedule I para 2 proviso). Track the total per employee.
- Above ₹50,000, CBIC's 2017 press release treats the gift as taxable, which we read as its full value. A press release has no legal force, and an excess-only view exists in commentary without official support.
- Gifts to customers and dealers, and free samples, carry no output GST, but Section 17(5)(h) blocks the credit. The Madras High Court applied this to promotional gold coins and T-shirts in ARS Steels (24 October 2024).
- The 57th Council recommended lifting the block on free samples (PIB, 8 October 2026). It is not law until the Act is amended and commenced.
- Buy-one-get-one offers are not gifts, and credit stays available (Circular No. 92/11/2019-GST).
- Report blocked credit in GSTR-3B Table 4(B)(1), not 4(D) (Circular No. 170/02/2022-GST).
Frequently Asked Questions
Is GST payable on Diwali gifts given to employees?
Not if the employee's gifts stay within ₹50,000 in the financial year, under the proviso to paragraph 2 of Schedule I to the CGST Act. Above that, CBIC's press release of 10 July 2017 treats the gifts as subject to GST. Cash gifts are never a supply, because money is not goods or services.
Can I claim ITC on gifts given to clients and dealers?
No. Section 17(5)(h) blocks credit on goods disposed of by way of gift, and Circular No. 92/11/2019-GST dated 7 March 2019 extends this to inputs, input services and capital goods used for the gifts. The Madras High Court upheld the denial for promotional items in ARS Steels (W.P. Nos. 31, 33 and 35 of 2022, 24 October 2024).
Is ITC on free samples allowed after the 57th GST Council meeting?
Not yet. The Council recommended on 8 October 2026 that the Section 17(5) restriction on free samples be removed, but this needs an amendment to the CGST Act and a commencement date. Until then Section 17(5)(h) still applies.
Is GST charged on gift vouchers given to employees?
No GST applies to the voucher itself. Circular No. 243/37/2024-GST dated 31 December 2024 clarifies that transactions in vouchers are neither a supply of goods nor of services. GST applies to whatever the employee buys when redeeming it.
Last verified: 25 October 2026. Based on GST provisions as of 25 October 2026. Rules may have changed — verify before acting.
⚠️ For informational purposes only.
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