Is a Diwali Bonus Taxable? What TDS You Must Deduct

Yes, a Diwali bonus is taxable as salary. Where the employee’s income is high enough to owe tax, it comes off the payslip before the money reaches them.

The part employers get wrong is the rate. A bonus does not carry a flat rate of its own. TDS, which is tax deducted at source, runs at the average rate across the employee’s estimated salary for the whole year.

I have watched the rate mistake play out in a payroll run more than once. The bonus is approved, the deduction is set at a round number, and the shortfall turns up in February, with one month left to recover it in.

There is a second trap in the timing. Diwali bonus tax is charged once, and not always in the year the money leaves your account. Three rules decide which year, and the one people get wrong turns on whether the bonus was already taxed when it fell due.

And there is a trap worth checking every year. Under the new tax regime, a bonus that pushes someone just past ₹12 lakh of taxable income can leave them with less than a smaller bonus would have.

Many bonus tax guides online still quote section 87A, section 89 and section 192. Those belong to the Income-tax Act, 1961, repealed on 1 April 2026. This one uses the new Act’s numbers throughout, with a table of old and new below.

Is a Diwali Bonus Taxable?

It is. A bonus is taxed as part of salary, and how the law gets there is worth knowing, because the route surprises people.

Section 16 of the Income-tax Act, 2025 sets out what salary includes. It is a list of twelve items.

Wages, pension and gratuity are on it. So are fees or commission, perquisites, an advance of salary and leave not taken.

The word bonus is not on the list. One of the twelve is wide enough to catch it anyway: profits in lieu of, or in addition to, any salary or wages.

A bonus is a profit paid in addition to wages, so it lands in that one.

That matters for a practical reason. Someone will ask you to point at the line that makes their bonus taxable.

Section 16 is the line that defines salary, and it never says bonus. Section 15 is what charges it. The item to read out is the one about profits in addition to wages.

Whether a bonus is owed at all is a separate question. That one sits in the Code on Wages, 2019, not in tax law.

Pay to a Partner Is Not Salary

A partner’s bonus is the exception. Say a firm owes a bonus to one of its own partners, or pays one.

Section 15 of the Income-tax Act, 2025 is the one that taxes salary. Its own subsection (4) takes a partner’s money straight back out of it.

The same goes for a partner’s salary, commission or remuneration from the firm, whatever it is called. It is still taxable income.

What it is not is salary. So it does not run through payroll and it does not carry salary TDS. Where it is charged instead is a question for the firm’s accountant.

Statutory bonus under the Code on Wages, 2019 is something an employer owes an employee. That is not the relationship a partner has with their own firm.

So tax law and labour law reach the same place by different routes. Neither treats a partner as staff.

This catches partnership firms that run their partners through the same payroll as their staff. A garment unit in Jaipur with four working partners and sixty employees has two different treatments in one spreadsheet.

What Changed in Diwali Bonus Tax Law

The law, not the treatment. The Income-tax Act, 1961 was replaced, and the sections everybody had memorised went with it.

The Income-tax Act, 2025 came into force on 1 April 2026. The Central Board of Direct Taxes notified the Income-tax Rules, 2026 on 20 March 2026 to go with it.

The Ministry of Finance’s own description of the new Act is the useful part. It was written without altering the underlying tax policy. A bonus is taxed exactly as it was. What moved is the numbering, the forms and the wording.

What changed	What it is now
The Act	Income-tax Act, 2025, in force 1 April 2026
The rules	Income-tax Rules, 2026, notified 20 March 2026
Assessment year	Tax year
How a bonus is taxed	No change at all

So the tax on a bonus is the same. Only the references moved.

Old Section Numbers and New Ones

Here are the provisions a Diwali bonus touches most often, with the number to quote now.

What it covers	Old Act, 1961	New Act, 2025
Salary charged to tax	Section 15	Section 15
What salary includes	Section 17(1)	Section 16
Standard deduction	Section 16(ia)	Section 19, Table item 2
New tax regime rates	Section 115BAC	Section 202
Rebate up to ₹12 lakh	Section 87A	Section 156
Relief for arrears or advance pay	Section 89	Section 157
TDS on salary	Section 192	Section 392
Employee’s claims for TDS	Form 12BB	Form 124
TDS certificate on salary	Form 16	Form 130

If a policy note or an employee’s query quotes the left-hand column, point them to the right-hand one.

Form 12BB vs Form 16 sets out which old number became which, and the investment declaration template already uses the current one.

Which Year Diwali Bonus Tax Is Charged

The tax year it becomes due, or the tax year it is paid. A bonus is taxed once, and three rules compete to decide which year that is.

A tax year runs 1 April to 31 March, and most accounting years close on the same date. A bonus for one year is usually paid during the next, which is where the confusion starts.

Section 15 of the Act sets out the three rules. A bonus can be caught by any one of them:

1. Due but not yet paid. Salary that falls due in the tax year is taxed in that year, whether the money went out or not.
2. Paid before it was due. Salary handed over in the tax year, before it was owed, is taxed in that year.
3. Arrears means pay that should have reached someone in an earlier year and did not. It is taxed in the year it finally arrives, as long as it was not taxed earlier.

Which Rule Catches Your Bonus

The first rule, due but not yet paid, is the common one. A bonus declared in February and paid in May is taxed in the February year, because that is when it fell due. The money crossed into the next year; the tax did not.

A festival advance lands on the second, paid before it was due. You hand it over in November, before the accounting year has even closed.

Nobody has worked out what the bonus will be yet. The advance is taxed in that year anyway.

The third rule, arrears, is the backstop. It catches a bonus for an accounting year that closed some time ago and was paid out late.

It is taxed in the year you pay it, as long as it was not taxed when it fell due.

So what separates rule one from rule three is not the dates. It is whether the bonus was already brought to tax in the earlier year. If it was, rule one has done its work; if it was not, rule three catches it on payment.

And an advance is never taxed twice. Pay counted in one year because it went out early is not counted again when it falls due.

If a bonus paid in arrears or in advance pushes a year into a higher rate, section 157 of the Act lets the employee apply to the tax officer for relief. It is not automatic, so tell them it exists.

Record a festival advance as an advance against the bonus, not as a separate gift. The advance and the bonus are squared up later, and the records have to show that.

How Much Diwali Bonus Tax to Deduct

At the average rate, not a flat one. Section 392(1) of the Income-tax Act, 2025 sets the deduction at the average rate of income tax for the year.

The rate is built from the salary you expect to pay that person over the year, less the standard deduction and any other deductions they can claim. Call that their taxable salary for the year.

The rate is not picked for the bonus.

It is the rate the employee’s whole year attracts, once the bonus is counted in.

How to Work Out the Average Rate

The method is the same whatever the rates are in the year you are running:

1. Estimate the employee’s salary for the whole tax year, with the bonus counted in.
2. Take off the standard deduction and any other deductions they can claim. That gives their taxable salary for the year.
3. Work out the tax on that figure at the rates in force, add the 4% cess, then divide by the figure. That fraction is the average rate.
4. Work out the year’s tax with cess, take off the tax already deducted in the months gone by, and spread what is left over the months that remain.

Diwali Bonus Tax on a Real Salary

Here is the whole calculation on one salary, so you can run the same steps against your own figures.

Take a shift supervisor at a fabrication unit in Ahmedabad on ₹18,75,000 for the 2026-27 tax year, under the new regime.

After the ₹75,000 standard deduction, taxable salary is ₹18,00,000. At the new regime rates in section 202 of the Income-tax Act, 2025, the tax is ₹1,60,000, and the 4% cess takes it to ₹1,66,400. The average rate is 9.24%.

Now add a ₹1,00,000 Diwali bonus. Taxable salary becomes ₹19,00,000 and the tax with cess ₹1,87,200. The average rate is now 9.85%.

The bonus did not get a rate of its own. It added ₹20,800 to the year’s tax and lifted the rate on the whole year from 9.24% to 9.85%.

The months already paid went out at the lower rate, so the shortfall on them is collected over the months that are left. You do not reopen a payslip.

A rate that moves on the whole year is why the November payslip surprises people.

An IT services firm in Hyderabad paying a month’s salary as a bonus will see this on many of its senior staff. At a supermarket chain in Lucknow, the store managers sitting just under ₹12 lakh are the ones to check, for the reason below.

Where a bonus sits inside a wider variable-pay scheme, split the bonus out from the rest before you estimate the year. Both are taxed the same way, but the regular variable pay is already in your monthly estimate and the bonus is the part that moves the rate.

When a Bonus Crosses ₹12 Lakh

The ₹12 lakh rule is well known. What it does to a bonus is easy to miss. Under the new tax regime, which applies unless an employee opts out, a resident employee whose income is all salary pays no income tax on taxable income up to ₹12 lakh.

Section 156(2) of the Act gives a rebate of up to ₹60,000, which wipes out the tax on a taxable income of ₹12 lakh or less.

Just above ₹12 lakh, a second rule steps in, called marginal relief. The tax is capped at the amount by which income goes over ₹12 lakh.

That cap covers income tax, not the 4% health and education cess the Finance Act, 2026 adds on top. So in this band, each extra rupee of income costs about ₹1.04 in tax.

The band runs from ₹12 lakh to about ₹12.7 lakh of taxable income. Above that, the normal slab rates take over again.

Three Bonus Sizes on One Salary

Take a store manager at that Lucknow supermarket chain on ₹12,25,000 a year. After the ₹75,000 standard deduction, taxable income is ₹11,50,000, and the tax is nil.

Diwali bonus	Taxable income	Tax with cess	Bonus left in hand
₹50,000	₹12,00,000	Nil	₹50,000
₹1,00,000	₹12,50,000	₹52,000	₹48,000
₹1,50,000	₹13,00,000	₹78,000	₹72,000

The ₹1,00,000 bonus leaves ₹2,000 less in hand than the ₹50,000 one. The second ₹50,000 costs ₹52,000 in tax.

Because TDS follows the year’s tax, the extra tax starts coming off from the month the bonus is paid.

I would also tell those employees the Act lets them opt out of the new regime. Whether that helps depends on their own deductions, so it is their call to make.

Checks Before the Bonus Run

There are six. The first three decide the amount, and the other three keep the paperwork straight.

1. Work the TDS out on the year’s estimated salary with the bonus in it, not on the bonus by itself.
2. Check each employee’s regime choice and declared deductions are current before you build the estimate. Under the old regime, a stale declaration inflates the rate.
3. List everyone whose taxable income will land between ₹12 lakh and about ₹12.7 lakh, and tell them what the bonus will leave in hand.
4. Tie a festival advance to the bonus in the records, so the later adjustment is traceable.
5. Tell people what is coming off, in writing, before the payslip arrives.
6. Reword any policy note that still cites the 1961 Act’s sections.

None of these apply to a partnership firm’s own partners, for the reason set out under Pay to a Partner Is Not Salary above. Run partners through a separate process.

A diagnostic lab chain that pays its bonus in one November run has the same job as a hotel that spreads it over two payslips. Only the number of payslips differs, and the rate is worked out the same way.

Professional tax is a separate state-level deduction off the same payslip. You can look up the state-wise rates to see who pays what, and when.

Diwali Bonus Tax in One Page

The short version is this. Diwali bonus tax is salary tax, unless the bonus goes to a partner of the firm paying it.

It is charged once. The year it fell due usually decides. A bonus paid long after that, and never taxed when it fell due, is caught as arrears instead.

Two things are worth getting right: the rate and the timing. Use the average rate for the year, not a flat figure.

And check who sits just under ₹12 lakh. For them, a bigger bonus can mean less money in hand.

On timing, an advance is taxed in the year it goes out. An overdue bonus that escaped tax at the time is taxed in the year it is paid.

Before the next run, rebuild the estimate from current declarations. Tell the people whose payslip will look different why it does.

The estimate is the part worth not doing by hand. You can see how Attendo handles a bonus month.

Frequently Asked Questions