Beware! Diwali, Dhanteras 2021 gifts can be taxed. Check these Income Tax rules to avoid taxmen’s Ire

Some gifts are taxable. Representative image

Income Tax Rules for Diwali Gifts Received from Family Members and Friends: All of us like to share gifts with our loved ones on the occasion of Diwali or Dhanteras. Not just sweets and goodies, we share gifts in the form of cash, gold and silver as well.

However, not many of us are aware that some of the gifts, if not reported properly, may draw the taxmen’s ire. According to Section 56 (2) of the Income Tax Act, gifts received in a financial year can be taxed as per the slab rate as ‘income from other sources. This article explains all that you need to know about tax implications for gifts received during festivals, or on any day during a financial year.

What kind of gifts are taxable?

Gifts that are received in cash and without any consideration, like goods or services in exchange, can be taxed.

According to Archit Gupta, Founder and CEO, Clear (formerly ClearTax), in the case of gifts in kind such as jewellery, bullion, sculptures, paintings, etc., they also get taxed at their fair market value if the same exceeds Rs 50,000.

“In the case of immovable property, if such property has been received without consideration, then the stamp duty value is chargeable to income tax if it exceeds Rs.50,000. However, in the event of immovable property being transferred with adequate consideration, then the stamp duty value will be taxed if it exceeds such consideration by Rs.50,000,” Gupta told FE Online.

The Income Tax Act states that a gift in cash from an employer is fully taxable in the hands of the employee.

What kind of gifts are not taxable?

The Income Tax Act 1961 has exempted gifts received from relatives.

Gupta said that according to the Act, a relative refers to the spouse of the individual, their siblings, their spouse’s siblings, their parents’ siblings, any lineal ascendant or descendant of the individual or their spouse, and the spouses of all the afore-mentioned persons.

This means you will not have to pay any tax if you receive gifts within the family from your parents, brother and his spouse, sister and her spouse, wife/husband and children and their spouses.

However, gifts received from any other person, including friends, are taxed if they cross the Rs.50,000 limit.

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Interestingly, gifts received on the occasion of wedding, or the ones received as inheritance are exempted from tax.

“The only other exemption to gifts being exempt from tax, irrespective of who the giver is, is if the recipient is gifted on the occasion of their wedding or the gift is transferred by way of inheritance or under a will,” Gupta said.

If the employer happens to give their employee a gift in kind, then the gift becomes taxable only if the value of the gift is Rs 5,000 or higher.

Is it mandatory to pay tax on such gifts?

According to Gupta, gifts in India are taxable if they cross a certain limit. It also depends on the person giving or receiving the gift. Are they related to each other?

“Section 56(2) of the Income Tax Act governs the taxability of gifts in India. According to this Section, if any person receives a sum of money exceeding Rs.50,000 in aggregate per annum as a gift, the entire amount will be chargeable to income tax. This means that if a person has received multiple gifts a year and they exceed Rs.50,000 in total, then the entire value will need to be reported while filing the income tax return for that year,” he said.

Rs 50,000 is not an exemption limit. So, even if you receive a taxable gift of Rs 50,001, the entire amount will be taxed at the applicable rate.

“Taxpayers should keep in mind that Rs.50,000 is not an exemption limit. Hence, if the gifts amount to even Rs.50,001 in total, the entire amount becomes subject to tax at the applicable tax rate,” Gupta said.