With the festival of lights approaching, it’s that time of the year when we plan gifts for our near and dear ones. On this auspicious occasion, people in our country exchange gifts to send positive vibes and express affection and gratitude. However, did you ever think that even gifts can attract taxes? Well, if you did not, then there’s not much worry. Keep scrolling and get to know if you need to worry about gift taxation.

Definition of Gifts

While a box of dry fruits and sweets are some of the most common gifts exchanged during Diwali, valuable items such as silver and gold coins also fall under the definition of gifts. Moreover, gifts received in the form of cheque or cash, immovable property such as buildings or land, and movable property such as jewelry, shares, etc. are also treated as gifts according to the Income Tax Act.

Understanding the Gift Tax Act

Abolishing the previous gift tax, a new reformed gift tax act was introduced in 2004. According to the new act, the gift recipient will have to pay taxes, unlike the abolished law, where the donor had to pay taxes.

As per Section 56(2) of the Income Tax Law, gifts received during a financial year, be it in cash or kind, will attract taxes if the total amount exceeds Rs. 50,000. If the total value of the gifts received does not cross the set limit, there will be no tax liability case on the recipient’s side. 

Cases in Which Gifts Do Not Attract Taxes

  • Gifts received from relatives

Even if the threshold of Rs. 50,000 is reached, gifts received from certain relatives are exempt from taxation. The relatives who fall under this exemption are:

  • Siblings
  • Husband or wife
  • Siblings of the husband or wife
  • Siblings of either of your parents
  • Any lineal ascendant or descendant of the spouse
  • Any other lineal descendant or ascendant of the concerned individual

However, note that gifts from friends are taxable. Moreover, though it may seem that the exchange of gifts with the relatives mentioned above functions both ways, then there are chances that you might be wrong. 

For example, if you plan to present a gift to your nephew or niece this Diwali, then they do not need to worry about taxation even if the value crosses Rs. 50,000. But, if you get any gift item or items from your niece or nephew, and the aggregate value of those exceeds the set limit, you will have to pay taxes on the value of the gifts.

  • Some instances when gifts are exempt from taxation

Other than the cases when one receives gifts from certain relatives, there are instances when gifts received do not attract taxes. The instances include:

  • Gifts given at weddings
  • Gifts that are offered via a will or acquired via inheritance
  • Gifts that one gets from the local administration
  • Gifts given by any educational institution or charitable organizations

Tax Implications for Gifts Received from the Employer

Many employers in our country offer gifts to the employees during Diwali. While some employees working in small companies get gifts such as a box of sweets or dry fruits or cash, people working in big multinational companies receive gifts such as magnificent silver or gold coins. 

No matter what, if the total value of the gifts exceeds Rs. 50,000, then the entire amount will be taken as part of the employee’s salary, and he will be taxed as per the required tax slab. To be more specific, these gifts comes under the category, ‘Income from Other Sources’.

However, as per the Income Tax Act, if the employee receives a gift voucher that amounts less than Rs. 5,000, it does not attract any taxes. Again, if the employer gets gifts in cash or convertible into money (e.g., cheque), it will be taxable. Even if the amount is as low as Rs. 1,000, but received in the form of cash, then, it will be treated as an income on salary.

Will Gifts, Both in Cash and Kind, Fall Under Taxation?

Be it cash or cheque, silver or gold jewelry or coins, paintings, or accent decor pieces, no matter what, if the gift’s value exceeds the set limit of Rs. 50,000 and do not fall under the categories where gift tax is exempt, it would fall under taxation.

Wrapping Up

Gift exchange in Diwali is a part of celebrating the diversity of our country. Therefore, it becomes essential that before you plan your gifts for your loved ones or friends, or employees, you are entirely aware of the tax impositions associated with gifts. Now, once you are familiar with the laws, wait no more and start packing your gifts!