Diwali is over, as are the fireworks. But the joy of gifting continues. For, the wedding season is set to begin from 23 November, and will last till 15 December. According to the research arm of Confederation of All India Traders, there will be a record 3.5 million weddings taking place in India this year.
Marriages, one of the biggest financial goals of most Indian families, is a reason for great celebration. On this occasion, newlyweds, as well as their families, usually receive gifts from well-wishers. Such gifts can, however, attract the provisions of the income tax laws.
Relatives vs friends
According to Indian tax rules, gifts received by an individual on any occasion, including a wedding, are exempt from tax totally but those from friends are tax-free only till the limit of ₹50,000, on occasions other than wedding. So, if a gift given by any friend on a birthday or anniversary is valued at ₹1 lakh, the entire ₹1 lakh is taxable under ‘income from other sources’.
Do note that marriage is the only occasion when tax is exempted totally on all gifts received by the bride and groom from both relatives and friends.
In Indian weddings, even close relatives of the married couple receive gifts. In their case though, gifts valued above ₹50,000 will be considered as ‘income from other sources’ and the recipients will be taxed as per the income slab rate on the full value of the gift.
Marriage ceremonies
Gifts given on the occasion of marriage not only include presents gifted on the day of marriage but also those accepted during ceremonies that precede a marriage or functions that follow a wedding. For example, gifts received by the groom and bride during mehendi, sangeet, bidaai or a wedding reception will be tax-exempt fully. Such an exemption is allowed because the tax rule does not explicitly define the wedding functions. So, gifts received in ceremonies linked to the marriage will be tax-exempt. However, any gifts received during betrothal ceremonies will not be considered as a marriage gift. That’s because the betrothal ceremony is where the two families—those of the bride and the groom—only express their commitments to marriage, much before they come together to conclude all the marriage ceremonies.
The gifts given on betrothal will need to adhere to the ₹50,000 rule. So, any gift that has more value will be fully taxed in the hands of the recipient. All gifts need to be voluntary and should not be a pre-requisite as that would be in breach of anti-dowry laws.
Clubbing provisions
Any income arising from a wedding gift will attract clubbing provisions with respect to certain relatives. “If there is any income arising from a gift given by the father or mother of the groom to their daughter-in-law, it will be clubbed with the income of the respective parents-in-law and get taxed as per the in-law’s income tax slab,” says Balwant Jain, Mumbai-based tax and investment expert.
However, if the gift is made by the in-laws closer to the date of marriage, such clubbing provisions won’t be applicable. But the ₹50,000 threshold on gift value will still apply, as the woman is yet to become a member of the groom’s family.
“Clubbing provisions will continue to apply even after the asset changes its form,” Jain adds. For example, if a piece of jewellery that is gifted to the daughter in law is sold off after a certain period, capital gains from such a sale would be clubbed with the income of the respective parents-in-law.
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Recording gifts
It is important to record all the gifts received during marriage, whether it is in the form of cash or immovable assets. If any query is raised by the taxman, you should be able to sufficiently prove that these gifts were received on the occasion of the marriage, with proper paperwork to support it.
“It is recommended to declare the high-value gifts under ‘income from other sources’ in the exempt income section. If the asset is later sold and there is any capital gain, this would help to create a proper trail,” says Nitesh Buddhadev, Mumbai-based chartered accountant and founder of Nimit Consultancy.
If there is no proper paperwork and the tax department doesn’t find your explanation to be satisfactory, it can levy a tax rate that is much higher than your original income slab rate, along with appropriate interest charges for the delay in receiving the taxes.
How much to gift
It is advisable that relatives or friends give gifts that are commensurate with their financial status or their relationship with the newlywed couples. A very costly gift can raise questions from the tax department, as to the source of such a gift. Also, an acquaintance other than a relative giving a very expensive gift can also lead to scrutiny. Bogus gifts, or gifts for converting black money into white, can lead to a serious tax litigation.