income from tips to Hotel Staff

Technically the tips is what the hotel waiters should be adding on to their salary income as it is an income received during the course of his / her employment. There are various modes through which a waiter can receive the tips:-

1) Cash from the customer (keep the change etc.). Even though the employer is not deducting TDS on this the waiter should add such tips to his salary income as it is earned by him legally during course of employment. In developed countries like USA this is how it is done.

2) Tips may be collected and added to a common pool and at end of day employer may distribute it to all waiters equally. This is the practice at many places. Employers retain the tips in the common pool and also add the tips (less transaction charges) on tips left by credit cards. This is then distributed equally to the waiters. Employers should deduct TDS at applicable slab of the employee.

Normally in India most tips go unreported as employer and employee do not want to get into hassles of establishing source. In mature economies like USA the IRS has assumed that waiter will get tips and to a reasonable extent does not hassle on tips received especially if collected in a pool by the employer and added to the salary. Mosty they charge tips to credit cards and therefore this practice has to be adopted.

Please check from your CA what his views are on this. My view is too general and out of context of CA exams in India.

Basically tips are received during course of employment. The nature is in form of incentives or gratification for giving a service. For an employee all such receipts are in the nature of salary.

In india these types of income is not disclosed by employee/employer. If there are any system in any organisation to record this income then it should be shown as a part of Salary of employee and TDS should be deducted as per norms.

But there will not be any employer employee relationship as it is received directly bt customer...

Then It will considered as Income from Other sources

will it be included in cash gifts not exeeding 50000 and will be exempted???

In case of hotels where TIPS are pooled and distributed to the hotel staff, it would be part of salary. However, in my opinion the same cannot be classified as 'commission earned as a percentage of turnover achieved' to leverage the Employees' separation compensation such as Gratuity.

Tips would not be in the nature of gift from the customer - it is compensation for services. 

(TIPS - To insure Prompt Service)

TIPS would thus have the character of salary where there is proper records of the same. Where the employer employee relationship does not subsist to earn the tips, then you may take the same as income from other sources.

Tips received from customers of the hotel, can not be treated as "Income from salary" as  the amount were not received from employer.  There is no employer-employee relationship between the customer and the hotel staff.

You can not be treat it as gift from the customer, as tips were received from the customer towards some service rendered and it can not be treated as amuont received without any consideration. To defining any amount as gift the payment should be voluntary and without any consideration.

Finally, it should be declared under the head  "Income from other sources" and salary and other benefits received from the employer should be declared under the head "Income from Salary"

As per Income tax Act section 56 (1) Income from other sources is a residury head. and any income which doesn't fall under any other head, then it will be charged under other sources. In your case, This trip income is neither falling u/s 15 (coz employer-employee relation doesn't exist)nor u/s 22 (house property)nor U/s 28 (PGBP) and nor U/s 45(1)(Capital gain. Hence finally it qualifies as a residuary income and is chargeable under section 56(1) i.e; other sources.

Manmohanji,

If the tip is in common pool and moreover charged to credit card by customer, it will in any case finally be disbursed by the employer. For this payment employer employee relationship DOES EXIST. Yes, maybe other sources if waiter pockets the change or is gratified by the customer directly. Therefore, we should see who is finally disbursing the tip, employer (from common pool) or customer (directly to waiter).

Tips should be charged under Income from other sources ..if reported at all

Tips dont form a  part of the salary for the purposes of PF . According to an old judgement in the case of Management of Wenger v/s workmen ( This is not an IT case but an industrial disputes case ) it was held that Tips are paid not by the employer but by the customers and they are paid not only for the service received in the restaurant or the hotel, but for the promptness shown by the waiter and his smartness and efficiency.Tips cannot be strictly said to be a part of the salary .

It was also held in some other industrial dispute case , that the moment tip is received , the money so received becomes the property of the waiter .

Even if the money is received via credit card and goes into the common pool , what the resturant owner is distributing is the property of the waiters . He just does that as a matter of convienence to waiters .

Tips are not fixed , If there is a service charge levied by some bigger hotels as tips ( 5% of the bill etc as tips  ) then the tips so collected can be a part of the salary

I am not so sure it will form a part of the salary.

I think it should be under IFOS and will be taxable (not a gift )

Not taxable & no need to file income tax return for the same(I presume there is no other income under any other head)

sunil

The Answer is still not clear.. i am not getting any conclusion...

Is there any base to include it in the Income from other sources.