Diwali season: Do you have to pay tax on gifts received ?

The festive season of Diwali is around the corner. This is a period when one receives gifts from friends, relatives and employers, among others. But are these gifts tax-free under existing laws? Business Standard decodes the answer for you.

When it comes to taxation, gifts exchanged during Diwali can have different tax implications, depending on various factors. The taxation of gifts in India is governed by the Income Tax Act, and it's essential to understand what is taxed and what is exempted.

"Gifts received from specified relatives are fully exempt from tax, regardless of the value. However, gifts received from non-relatives, including friends and colleagues, are taxable if the aggregate value of such gifts exceeds Rs. 50,000 during a financial year. If the total value of the gifts exceeds Rs. 50,000/- during a financial year, the entire amount is taxable under "Income from Other Sources" at the recipient's applicable tax rate," said Vipul Jai,

 

Partner, PSL Advocates & Solicitors

What this means is that if the total value of gifts received during a financial year exceeds Rs 50,000 in a financial year, then the whole value of the gifts is taxable. This includes gifts received in cash or kind, such as jewellery, electronics, home appliances, and even vouchers and gift cards.

"The value of the gift is added to the recipient's total income and taxed as per their applicable tax slab. If you receive a gift worth Rs. 60,000 during Diwali, the additional Rs. 10,000 will be added to your taxable income. Gifts received from non-relatives, like friends or colleagues, are taxable if the total value exceeds Rs 5,000 in a financial year. If you receive a gift worth Rs. 6,000 from a colleague during Diwali, the additional Rs. 1,000 will be added to your taxable income," said  Ankit Rajgarhia, Principal Associate, Karanjawala & Company, Advocates

 Ankit Jain, Partner, Ved Jain & Associates, explains the different tax implications with the following examples: 

Gifts received from friends and colleagues
Example 1: If you receive a cash gift of Rs 60,000 from your friend on Diwali, you will be liable to pay tax on the entire amount, as it exceeds Rs. 50,000.

Example 2: If you receive a gold bracelet worth Rs 40,000 from your colleague on Diwali, you will not be required to pay any tax on it. However, if another colleague gifts you a Bluetooth speaker worth Rs 15,000, then you will have to pay tax on the full Rs 55,000 as it exceeds Rs 50,000. 

However, when it comes to gifts received from relatives, there's some relief. Gifts received from specified relatives, such as spouse, children, grandchildren, parents, grandparents, siblings, and their spouses, are exempt from tax, irrespective of the value of the gift.

Example: If you receive a cash gift of Rs  1 lakh from your husband on Diwali, you will not be liable to pay tax on the gift, as it is from a specified relative.

Gifts received from employer

Gifts received from an employer are taxable under the head of "Income from salary". However, there is an exemption of up to Rs. 5,000 in a financial year on gifts received from an employer.

Example:

If you receive a cash gift of Rs 4,000 from your employer on Diwali, you will not be liable to pay tax on the gift. However, if you receive a cash gift of Rs 6,000 from your employer on Diwali, you will be liable to pay tax on Rs. 1,000, as it exceeds the exemption limit.

Implications of Section 194R

At the time of Diwali, a lot of businesses also give gifts to their customers, vendors and associates. They need to be mindful of Section 194R, which requires a deduction of tax when the value of the gift given is more than Rs 20,000. In such a case, TDS at the rate of 10 per cent is required to be deducted from the recipient of the gift. 

Example:

ABC Industries gifts a TV worth Rs 1 lakh to their best dealer, Mr. B, on Diwali. Since the value of the gift exceeds Rs 20,000, they are required to deposit a TDS of Rs. 10,000 to the government.

What is exempted? 

Gifts from relatives: Gifts received from relatives, such as parents, siblings, and grandparents, are entirely exempt from taxation, regardless of the value. Diwali gifts from family members are considered as expressions of love and are not subject to income tax, said Rajgaria. 

Example: If you receive a Diwali gift worth Rs. 1,00,000 from your parents, it is entirely exempt from taxation.

Gifts received during weddings: Gifts received during weddings are also exempt from taxation, irrespective of the value. This exemption applies not only to the couple getting married but also to their families.

Example: If you receive valuable gifts during a Diwali wedding celebration, they are not subject to income tax.

It's essential to maintain records of the gifts you receive, especially if they have a significant value, to comply with tax regulations.