How Diwali Gifts May or May Not Attract Income Tax?

The day of lights, gifts, and sweets is around the corner. Are you planning to gift your special ones? Before executing your plan, you must know whether those gifts will have any tax implications. Some of these gifting transactions may attract the taxman to you. In this article, we will inform you about the gifts that are taxed and what percentage of its value is taxed. 

Prior to 1998, the person offering the gift had to pay 30% tax under the Gift Tax Act. This act was withdrawn by the former Finance Minister of India, Yashwant Sinha. Later in the year 2004, Section 56 was introduced to the income tax law, which provided that all the gifts received from the blood relations are exempt from tax under certain conditions. 

Diwali Gifts Received from Relatives

Gifts received from relatives are fully tax-exempt under the income tax provisions. However, any income earned from such gifts will be taxable in the hands of the person giving the gift. It means the clubbing provisions will apply to the person offering the gift. 

For income tax purposes, here is the list of relationships that will be considered as relatives:

  • Husband or wife
  • Brother or sister
  • Spouse’s brother or sister
  • Parent’s brother or sister
  • Son or daughter
  • Brother’s or sister’s spouse 

For instance, if you receive a gift worth Rs 1 lakh from your parents this Diwali, you won’t be liable to pay any tax. But, if you receive any income from such gift as interest or profits from investment, you will have to report such income while filing your income tax return under the head ‘Income from other sources’ and pay tax as per your tax slab. 

Diwali Gifts Received from Sources Apart from Aforementioned Relatives

Any gift exceeding worth Rs 50,000 as received by an individual in a financial year is taxable under the head ‘Income from Other Sources’ and is taxed according to the individual’s tax slab. The monetary limit of Rs 50,000 is an aggregate limit.

That means if you receive four gifts worth Rs 15,000 each from four different friends in a year, it means you are exceeding the tax exemption limit of Rs 50,000 and the aggregate amount of Rs 60,000 will be taxed, rather than the difference of Rs 10,000.

Also Read: EPFO Declares 60 days’ Productivity-Linked Bonus for Diwali

Diwali Gifts or Bonus Received from Your Employer

Any gift voucher or token worth more than Rs 5,000 received from the employer on an occasion such as Diwali or Christmas is considered as a part of individual’s salary and will be taxed according to their income tax slabs. 

There is no such exemption on the cash gifts received by employees from the employer. Even if one receives a cash gift of Rs 1,000 from their employer, it will be taxed as a part of their salary. 

Situations Where Any Gifts are Exempt from Tax

If a gift is received from a relative or under certain specified circumstances, there will be no tax liability. The allowed circumstances are: 

  • The occasion of a wedding 
  • As per a will 
  • By way of inheritance or in contemplation of death of the payer
  • Gift received from the local administration
  • Gift received from any educational institution under Section 10(23)
  • Gift received from the charitable organisation

Be cautious about giving or receiving Diwali gifts this year. You might be required to pay tax on such gifts if the aggregate value of the gifts received from others (apart from relatives) exceeds Rs 50,000.

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

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