Diwali is the festival of light which is celebrated all across the nation with full of energy and positive vibes. Exchanging of gift is quite common in this festival. But what we never realized that gifts we received on this auspicious occasion attract taxes to a considerable extend. That means that some of the gift that you received on this festive occasion may falls under certain tax slab recommended by the income tax department. In this write-up we will provide you generalized idea about the tax on Diwali gifts. Before we shed some light on the tax on diwali gift, let take a look in the historical context of the same.
An overview of Dissolution of Gift Tax Act
Prior to 1998 when the Gift Tax Act was in existence, the donor in the gifting process had to confront 30% of tax on the value of the gift. Further, the same act abolished under the guidance of finance minister Yeshwant Sinha in the year 1998. In 2004, government came up with new provisions that provide tax exemption on gift taken by blood relations as per the Section 56, but it was taxable if the conditions were breached.
What Section 2 (24) and Section 56 (2) of the Income Tax Act says?
Section 2(24) of the IT Act states that the gifts received by the person would be treated as his/her income. Meanwhile, Section 56(2) talks about the exemption and tax liabilities on them.
In case the aggregate value of the gift received from different sources for a given year surpassed Rs 50,000, such an income would be taxable under the IT Act. But, if the gross amount of the gift received remain under the Rs 50,000 mark, then no tax liabilities would be imposed on the recipient in such a case. All the gifts whether received in cash or as a gift voucher or in-kind have to be considered for arriving at the threshold.
Tax Implications on the Gift Received From the Relative
Gifts worth Rs 50,000, received from blood relations are excluded. The exemption in the view of such exclusion included sister, brothers, spouse of the receiver himself. It also includes spouse’s brother and sister.
Furthermore, the definition of the relatives under the law also covers the individuals who are lineally ascendants of decedents of the recipient. The definition of relative doesn’t encompass the entire relative despite being so vast in nature. Gift received from the following individuals are exempted, those are as follows:-
Gifts Received from Friends and Others
If the recipient receives the gift from the individual other than the blood relation then it would be come under the tax regime. The tax exemption is applicable upto Rs 50,000 on the entire gift received from all sources. However, gifts (either Diwali or any other) up to Rs 50,000 received in aggregate during the financial year are exempt from tax.
Gifts Received From the Employer
As per the IT Act[1], if an employer presents any cash or gift voucher amounting to less than five thousand rupees for a given financial year, won’t attract any tax liabilities. However, of the gift value surpasses the given amount then the whole amount would be deemed as an individual’s salary and taxed according to the slab rate.
Gift Received By the Professional and Business Owner
The gift received by the professional or business owner during the course of their work would attract tax liabilities irrespective of the basic threshold limit. Things like sweet boxes and dry fruit are required to be deemed as a part of taxable income because such gift manifest privilege received during the course of professional or business activities.
Situation under Which Gifts are Exempted
If the recipient receives the gift from the relative or under specified events, there would be no tax imposition. The permissible events are given below:-
- Wedding
- By way of contemplation of demise of the payer
- Gift presented by the local administration.
- Gift presented by the educational institutions as per Section 10(23).
- Gift presented by the charitable organization
Be wise while presenting or receiving gift in the upcoming festive season. Tax authority might impose tax on diwali gifts once the gross value of the received gift surpasses the Rs 50,000 mark.
Points worth remembering Regarding Tax on Diwali Gift
- Gift received during special occasion such as marriage doesn’t attract any taxes. Under such scenario tax on Diwali gifts are nil.
- For example- you have received a bike as a gift from your blood relation on the occasion of your weeding. Make sure the gift deed for the same should contain the date of your marriage in order to avail the tax benefits.
- Any gift you received in the form of will or inheritance does not come under any tax liabilities. However, any income reaped from such a gift will be taxable under the head “income from other sources”.
- Any gift received in the contemplation of the demise of the giver is eligible tax exemption.
Conclusion
Gifting is nothing but an expression of love and affection. By taking taxation into the account, it becomes important for the taxpayers to know their tax liabilities and way of its disclosure. While receiving valuable gifts during the festive season, don’t forget to put the taxation norms into the consideration. Tax on Diwali gifts seems to be an unjustifiable proposition for many of us but we should not forget that the gifting is also is sort of value transfer.
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