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Section 56(2)(x) of the Income Tax Act outlines the rules regarding the taxation of gifts.
Know about the tax on gifts received during the Diwali season. (Representative image)
Diwali, the festival of lights, is a time of joy, celebration, and exchange of gifts. Whether it’s cash, jewelry, or other valuable items, giving and receiving gifts is an integral part of Indian culture, especially during Diwali. However, from a taxation perspective, many individuals remain uncertain about the tax implications associated with gifts. Do gifts received during Diwali attract taxes, and if so, what are the applicable rules?
Understanding the Basics of Gift Tax in India
In India, gifts were taxed under the Gift Tax Act, 1958, but the government abolished the Act in 1998. However, certain provisions related to the taxation of gifts were reintroduced in 2004 under the Income Tax Act, 1961. According to these provisions, gifts received by an individual or Hindu Undivided Family (HUF) exceeding a specific value are considered as income and are subject to taxation.
Section 56(2)(x) of the Income Tax Act outlines the rules regarding the taxation of gifts. The provisions apply to all kinds of gifts, including those received during festivals like Diwali. Gifts can take various forms, such as cash, movable or immovable property, and even financial instruments. However, there are certain exemptions and conditions that every taxpayer should be aware of to avoid any potential tax liability.
What Kinds of Gifts are Taxable?
Under Section 56(2)(x), the following types of gifts are taxable if their aggregate value exceeds Rs 50,000 in a financial year:
1. Monetary Gifts: Cash, cheques, or bank transfers.
2. Movable Property: Jewelry, shares, and securities, bullion, artworks, etc.
3. Immovable Property: Land, buildings, or any real estate.
If the total value of gifts in these categories exceeds Rs 50,000 in a financial year, the entire amount is considered taxable as “Income from Other Sources” and added to the recipient’s taxable income.
Exemptions to Gift Tax
While the law mandates that gifts exceeding Rs 50,000 are taxable, several exemptions can help recipients avoid taxation. The key exemptions are as follows:
1.Gifts from Relatives: Any gift received from a “relative” is exempt from tax, regardless of the value. As per the Income Tax Act, relatives include:
- Spouse of the individual
- Siblings (brother or sister)
- Parents and grandparents
- Children (son or daughter)
- Siblings and parents of the spouse
- In-laws (son’s wife or daughter’s husband)
For example, if you receive gold jewelry worth Rs 1 lakh from your parents during Diwali, it is not taxable as it falls under the exemption of gifts from relatives.
2. Gifts Received on Special Occasions: Gifts received during weddings are also exempt from taxation, regardless of who the donor is. However, this exemption is limited to weddings and does not apply to other special occasions like birthdays, anniversaries, or festivals like Diwali.
3. Gifts from Friends or Non-Relatives: Gifts received from friends or non-relatives are subject to tax if their total value exceeds Rs 50,000 in a financial year. If the value of such gifts remains below the Rs 50,000 threshold, they are not taxable.
4. Inheritances: Any property or money received through inheritance or a will is not treated as taxable income. This includes ancestral properties passed down through generations.
5. Gifts to Charitable Institutions: If you donate gifts to a charitable institution or trust, they are not taxed, and you may be eligible for tax deductions under Section 80G, depending on the type of charitable organization.
Taxation of Employer Gifts During Diwali
It is quite common for employers to offer gifts to their employees during Diwali, such as vouchers, gadgets, or bonus payments. The taxability of these gifts depends on their value and form:
1. Cash Gifts: If the employer gives cash, it is fully taxable as part of the employee’s salary.
2. Non-Cash Gifts: Non-cash gifts (such as vouchers, gadgets, or appliances) valued up to Rs 5,000 are exempt from tax. If the value of non-cash gifts exceeds Rs 5,000, the excess amount is added to the employee’s taxable salary and taxed as per the applicable income tax slab.
3. Bonus Payments: Any Diwali bonus paid by the employer is considered part of the employee’s salary and is fully taxable.
Recording and Reporting Gifts
It is essential to maintain records of the gifts received, especially if they are substantial in value. In case the aggregate value of gifts exceeds Rs 50,000, it is the taxpayer’s responsibility to report these under “Income from Other Sources” when filing their income tax return (ITR).
Additionally, for high-value gifts like property or luxury items, it is advisable to document the transactions properly, including the donor’s details, to avoid any scrutiny from the tax authorities.
Conclusion
While Diwali is a season of joy and generosity, it is crucial to stay informed about the tax implications surrounding gifts. In India, gifts are taxable if they exceed Rs 50,000 in a financial year unless they come from exempted sources like relatives or weddings. As a responsible taxpayer, you should be aware of the exemptions and thresholds that apply, ensuring that you don’t inadvertently end up with an unexpected tax liability. This Diwali, celebrate with love and joy, but also with a clear understanding of your tax obligations.
By being informed, you can enjoy your festive season worry-free while staying compliant with the tax laws.
-The author is a chartered accountant and MD of Neeraj Bhagat & Co. Views expressed are personal.
