Beginning October, the festive season from Dussehra to Diwali comes with celebrations, new clothes and good food. And gifts, of course. Gifts during this season are something that everyone looks forward to, both young and old. However, the income tax laws in India have provided for the taxation on gifts. So, whether you have received gifts already or are expecting to give or receive some this Dhanteras and Diwali, you should know about the tax implications on gifts under the Income Tax Act.
Section 56(2) decoded
In India, gifts are taxed under Section 56(2) and are to be disclosed under ‘Income from other sources’ when filing the income tax return. However, not all gifts are taxable. Only gifts exceeding Rs.50,000 per year in the aggregate are taxed. If the sum of all gifts received equals Rs.50,000 or less, the same is tax-free. However, Rs.50,000 is not an exemption limit. Hence, if you receive gifts amounting to even Rs.50,001, you will be required to pay tax on the entire amount at the rate applicable.
Types of gifts that are taxed
Gifts received in cash without any consideration will be taxed. By consideration, it means that there is no promise of transferring any goods or services of value in exchange for the money received. In the case of immovable property, if the same has been received without consideration, the stamp duty value is chargeable to income tax if the same exceeds Rs.50,000. If the property is transferred with an adequate consideration, then the stamp duty value exceeding such consideration will be chargeable to tax. In the latter case, the stamp duty value should exceed the consideration value by Rs.50,000 to be liable to tax.
In the case of jewellery, paintings, shares, etc., the fair market value of such items received would be chargeable to tax if the same exceeds Rs.50,000.
Cases where gifts are not taxed
The income tax laws have exempted gifts that are received from relatives. The definition of a relative has been laid down in the Act. According to the definition, a relative means-
- The spouse of the individual
- A sibling of the individual
- A sibling of the spouse of the individual
- A sibling of either of the parents of the individual
- A lineal ascendant or descendant of the individual or the spouse of the individual
- The spouses of all the persons referred to above
Gifts received from anyone other than the ones mentioned above will be taxed if they cross the Rs.50,000 limit.
Further, any gifts given on the occasion of a wedding or transferred under a will or by way of inheritance are exempt from tax. This is irrespective of whether the gifts are received from a relative or any other person.
Tax on gifts received from an employer
As per the Income Tax Act, if an employer gives their employees a gift in cash or kind exceeding Rs.5,000 in value, the entire amount is treated as a part of the employee’s salary and taxed as a perquisite according to their applicable tax slab.
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Athena is a globe-trotter whose aim is to see 30 countries before she’s 30. When she’s not travelling, she’s busy planning her next trip. She’s a Chartered Accountant by profession with a keen focus on GST. She writes by day and reads by night.