The holidays of Diwali are just around the corner. This is a period in which one receives gifts from friends, relatives and employers, among others. But are these gifts tax-free under existing law? Business Standard decodes the answer for you.
When it comes to taxes, gifts exchanged during Diwali can have different tax implications depending on several factors. Taxation of donations in India is governed by the Income Tax Act, and it is essential to understand what is taxed and what is exempt.
“Gifts received from certain family members are completely tax exempt, regardless of value. However, gifts received from non-family members, including friends and colleagues, are taxable if the aggregate value of such gifts during a financial year exceeds Rs. 50,000. If the total value of the gifts exceeds Rs. 50,000/- during a financial year, the entire amount being taxable under “Income from Other Sources” at the applicable tax rate of the recipient,” said Vipul Jai,
Partner, PSL lawyers and attorneys
What this means is that if the total value of gifts received during a financial year is more than Rs 50,000 in a financial year, then the entire value of the gifts is taxable. This includes gifts received in cash or in kind, such as jewelry, electronics, home appliances, and even vouchers and gift cards.
“The value of the gift will be added to the recipient’s total income and taxed at the applicable tax rate. If you receive a gift worth Rs. 60,000 during Diwali, the additional Rs. 10,000 will be added to your taxable income. Receiving Gifts from non-relatives such as friends or colleagues are taxable if the total value in a financial year exceeds Rs 5000. If you receive a gift worth Rs 6000 from a colleague during Diwali, the additional Rs 1000 will be added to your taxable income,” says Ankit Rajgarhia, Principal Associate, Karanjawala & Company, Advocates
Ankit Jain, Partner, Ved Jain & Associates, explains the various tax implications with the following examples:
Receiving gifts 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 do not have to pay tax on it. However, if another colleague gifts you a Bluetooth speaker worth Rs 15,000, you will have to pay tax on the entire Rs 55,000 as it exceeds Rs 50,000.
However, when it comes to gifts from relatives, there is some relief. Gifts received from certain family members, such as spouses, children, grandchildren, parents, grandparents, siblings and their spouses, are tax exempt regardless of the value of the gift.
Example: If you receive a cash gift of Rs 1 lakh from your spouse on Diwali, you do not have to pay tax on the gift as it comes from a particular family member.
Receiving gifts from employer
Gifts received from an employer are taxable under the heading ‘Income from wages’. However, there is an exemption of up to Rs. 5,000 per financial year in gifts received from an employer.
Example:
If you receive a cash gift of Rs 4,000 from your employer on Diwali, you do not have 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 this exceeds the exemption limit.
Implications of Section 194R
At the time of Diwali, many companies also give gifts to their customers, vendors and employees. They have to take into account 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, a TDS of 10 percent has to be deducted from the recipient of the gift.
Example:
ABC Industries is gifting a TV worth Rs 1 lakh to their top dealer Mr. B on Diwali. Since the value of the gift is more than Rs 20,000, they are required to deposit a TDS of Rs. 10,000 to the government.
What is exempt?
Gifts from relatives: Gifts received from family members, such as parents, siblings and grandparents, are completely tax exempt, regardless of value. Diwali gifts from relatives are considered expressions of love and are not subject to income tax, Rajgaria said.
Example: If you receive a Diwali gift worth Rs. 1,00,000 from your parents, it is completely tax exempt.
Receiving gifts during the weddings: Gifts received during weddings are also tax exempt, regardless of 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.
To comply with tax regulations, it is essential that you keep records of the gifts you receive, especially if they are of significant value.