6 Things You Must Know About Gift Taxation This Diwali

Diwali, the festival of lights, is an occasion where you exchange cash or gifts with your family and friends and spread positive vibes to your loved ones. Have you ever thought of these gifts from an income tax perspective? The gifts you receive may not always be tax-free. You may be required to pay taxes on some of them. 

Here is a list of 6 pointers you must know to understand the taxation on gifts as per the Income Tax Act, 1961.

1. Definition of Gifts

A gift can be money received in the form of cash or cheque, immovable property (land or building), and movable property (gold, jewellery, or shares).

2. Provisions of Section 56(2) of the Income Tax Act

Under Section 56(2), gifts received during the financial year, whether in cash or kind, are tax-free as long as the aggregate value of all gifts is within Rs.50,000. If this aggregate value of all gifts exceeds this amount, the whole amount will be taxable. 

3. Taxation on Immovable Property

If the stamp duty value of the immovable property exceeds the consideration amount by a minimum of Rs.50,000, then the stamp duty is chargeable to tax. 

4. Gifts from Family are Exempt

Section 56(2) states that receiving gifts from ‘relatives’ is exempt from tax. According to the section, the relatives who qualify for this exemption are:

1. Spouse
2. Siblings
3. Siblings of the Spouse
4. Siblings of either of Parents
5. Any lineal descendant or ascendant
6. Any lineal descendant or ascendant of the Spouse
7. Spouse of people mentioned in (b) to (f)

Note that gifts from friends are taxable.

5. Declaring Gifts in ITR

You have to declare the gifts while filing your income tax returns if the aggregate value of the gifts you have received during the year exceeds the limit of Rs.50,000. The gifts must be declared under the head ‘Income from Other Sources’. The value of gifts will be considered as part of your taxable income and will be taxed according to the tax bracket you fall in.

Also Read: When are you entitled to an income tax refund?

6. Other Gifts that are Exempt

Gifts received on the occasion of marriage is not charged to tax. Also, those gifts received by way of will/inheritance and gifts received in contemplation of death of the donor are tax-free. However, gifts received on any other occasions are considered for tax purposes. Even those received on birthdays and anniversaries are not exempt.

Illustration

Consider that Mr Arora receives shares of a company worth Rs.30,000 during Dasara from his childhood friend. Again, he receives Rs.20,000 from his business partner. As per Section 56(2), any gift received from a friend is taxable. Also, a business partner is not considered as part of the definition of ‘relatives’. In addition, the aggregate value of gifts Mr Arora has received during the financial year does not exceed Rs.50,000. Hence, it is not taxable as per Section 56(2). 

In the second case, Mrs Arora gifts Mr Arora a car worth Rs.4 lakh for Diwali. Mr Arora has not received any other gifts during the fiscal year. Since Mrs Arora is the spouse of Mr Arora, the gift presented by her is not taxable based on the definition of ‘relative’. Therefore, this gift is not considered taxable.

In the third case, a colleague of Mr Arora gifts him Rs.50,000 in cash as a gift or token of appreciation. Again, Mr Arora’s cousin gifts him gold jewellery worth Rs.1 lakh. This adds up to Rs.1.5 lakh worth of gifts during the fiscal year. Colleagues and cousins are not included in the definition of ‘relative’; any gifts received from them will be taxable. That is the entire gift value received by Mr Arora is taxable. Mr Arora, now, adds this amount to the taxable income while he files income tax returns.

Since you have gone through the definition of gift and the available provisions under Section 56(2), you must know how the gifts you have received are taxed. Enjoy the festival season.

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in