Income Tax: Know how your Diwali gifts will be taxed

Everyone loves a gift. But the manner of giving is more important than the gift per se. This is not a philosophical statement but a sutra to reduce the tax burden.

The Indian tax laws recognize the Indian culture of exchanging gifts between families and friends. When these gifts are exchanged between specified family members, on specified occasions or within the threshold limit between non-family members, no tax is levied on the value of the gifts.

In the coming days, India will witness the season of weddings and the Diwali festival. It’s a season of giving gifts by the employer to employees, friends and families to the bride and groom, seller to customers, etc. Before you give or receive a gift, learn about the income-tax provisions on the taxability of the gifts.

Section 56 of the Income-tax Act contains provisions relating to the taxability of gifts. Let’s see how this provision deals with different types of gifts.

Gifts received from relative: Any gift received by a person from his relative is entirely exempt from income tax. In income-tax law, a relative from the nearest family (spouse, parents, siblings, children), in-laws, grandparents, grandchildren, besides uncles and aunts can give tax-free gifts. However, receiving a gift from a cousin or sibling’s children will be taxable on crossing the threshold limit of ₹50,000.

Gifts received from the employer: Any gift received by an employee from his employer is not taxable if the aggregate value of such gift is up to ₹5,000 during the financial year. Where it exceeds, then the amount exceeding ₹5,000 is taxable in the hands of the employee as perquisites under the head of ‘Income from salary’. Further, the bonus received by an employee on Diwali or otherwise is also taxable as Income from salaries.

Gifts received on marriage: The gifts a bride or groom receives on the occasion of their marriage are fully exempt from tax. The exemption can be claimed by the bride or groom only and not their parents. Further, the exemption will be allowed on the occasion of marriage, not on their anniversary or any other ceremony.

Cash gifts from friends and others: If you receive monetary gifts in cash, cheque, drafts, etc. and the aggregate value during the year does not exceed ₹50,000, the entire gift will be tax-free. However, if it exceeds the said threshold, then the whole amount is taxable and not just the amount exceeding ₹50,000.

Valuable gifts from friends or others: Income-tax laws seek to charge tax on the gifting of certain valuable assets termed ‘movable property’. It means shares, securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, bullion, and Virtual Digital Assets (bitcoin or NFTs). If you receive a gift of any movable property defined above, and its aggregate fair market value does not exceed ₹50,000 during the financial year, then it shall be tax-free. If it exceeds the said amount, the entire value of such movable asset shall be taxable under the head of income from other sources.

Receiving electronic items as a gift: Electronic items like mobile phones, laptops, smartwatches, speakers, etc., are not covered within the meaning of movable property. So, receiving a gift of any electronic item from any person will not give rise to a taxable event. However, suppose you are receiving a gift in the course of running a business or profession. In that case, it shall be deemed to be a benefit or perquisite, and the value of such gifts will be taxable as business or professional income. Further, it will be mandatory for the donor giving a gift to deduct tax at source under Section 194R introduced by the Budget 2022 on the value of the gift.

Tax rates: If the gifts are taxable in the hands of the recipient, they are taxed as residuary income under the head of ‘income from other sources’. The tax on such income shall be charged as per the applicable slab rates.

Disclosure in Income-tax return: No disclosure shall be given in the Income Tax Returns (ITR) if the gifts are tax-free, and it shall be disclosed in Schedule OS of the ITR Form if it is taxable. Any non-disclosure of a taxable gift may attract a penalty between 50% to 200% of tax payable on income sought to be evaded.