Know how your Diwali gifts from various sources will be taxed

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 among non-family members within the limit limits, no tax is levied on the value of the gifts.

In the coming days, India will see the season of weddings and the festival of Diwali. It is the season for employers to give gifts to employees, friends and families to the bride and groom, vendors to customers, etc. Before giving or receiving a gift, learn about the income tax provisions on the taxability of gifts.

Section 56 of the Income Tax Act contains provisions relating to the taxability of gifts. Let us see how this provision relates to different types of gifts.

Gift received from relative: Any gift received by an individual from his relative is completely exempt from income tax. In the Income Tax Act, immediate family (spouse, parents, siblings, children), in-laws, grandparents, grandchildren as well as relatives of uncles and aunts can give tax-free gifts. However, receiving gifts from children of cousins ​​or siblings will attract tax on exceeding the limit 50,000

Gift received from employer: Any gift received by an employee from his employer is not taxable if the total value of such gift is up to 5,000 during the financial year. where it exceeds, then the amount becomes greater 5,000 is taxable as perquisite under the head ‘Income from salary’ in the hands of the employee. In addition, bonus received by an employee on Diwali or otherwise is also taxable as income from salary.

Wedding Gifts: Gifts received by the bride or groom on the occasion of marriage are completely exempt from tax. The exemption can be claimed only by the bride or groom and not by their parents. Also, the discount will be given on the occasion of marriage and not on their anniversary or any other function.

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

Valuable Gifts from Friends or Others: The Income Tax laws seek to levy tax on gifting certain valuable assets called ‘movable property’. This means shares, securities, jewellery, archaeological collections, paintings, paintings, sculptures, any work of art, bullion and virtual digital assets (Bitcoin or NFTs). If you receive a gift of any movable property as defined above, and its total does not exceed the fair market value 50,000 during the financial year, then it will be tax free. If it exceeds the said amount, the entire value of such movable property will be taxable under the head Income from other sources.

Receive electronic items as gifts: Electronic items like mobile phones, laptops, smartwatches, speakers etc. are not included in the meaning of movable property. Hence, receiving gift of any electronic item from any person will not give rise to a taxable event. However, suppose you are getting a gift while running a business or profession. In that case, it would be considered a profit or perquisite, and the value of such gifts would be taxable as business or professional income. In addition, it will be mandatory for the gift giver to deduct tax at source under section 194R introduced by Budget 2022 on the value of the gift.

Tax Rates: If gifts are taxable in the hands of the recipient, they are taxed as residual income under the head ‘Income from other sources’. Such income will be taxed as per the applicable slab rates.

Disclosure in Income Tax Return: If gifts are tax-exempt then no disclosure will be given in Income Tax Return (ITR), and if it is taxable then it will be disclosed in Schedule OS of ITR Form. Any non-disclosure of a taxable gift can attract a penalty of between 50% to 200% of the tax payable on the stolen income.

Naveen Wadhwa is Deputy General Manager in Taxman and Ashish Gupta is Deputy Manager in Taxman