Diwali Gifts are Taxable? Know this Income Tax Rules

Diwali, or the Festival of Lights, is a time for joy, celebration, and the exchange of gifts. Giving and receiving gifts, whether in the form of cash, jewellery, or other valuables, is an integral part of Indian culture, especially on the day of Diwali.

However, many individuals are still unaware of the tax implications associated with giving gifts, from a taxation perspective. Do gifts received during Diwali attract taxes, and if so, what are the rules?

Understanding the Fundamentals of Gift Tax in India

In India, gifts were taxed under the Gift Tax Act of 1958, which was revoked by the government in 1998. However, certain regulations relating to the taxation of gifts were restored in 2004 under the Income Tax Act of 1961. According to these rules, gifts received by an individual or Hindu Undivided Family (HUF) that surpass a certain amount are deemed income and liable to taxation.

Section 56(2)(x) of the Income Tax Act explains the rules for taxing gifts. The provisions apply to all types of gifts, including those received during festivals such as Diwali. Gifts can take several forms, including cash, moveable or immovable property, and financial instruments. However, there are some exemptions and conditions that all taxpayers should be aware of in order to avoid any tax liabilities.

What Types of Gifts Are Taxable?

Under Section 56(2)(x), the following forms of gifts are subject to tax if their total value exceeds Rs.50,000 in a financial year:

Monetary Gifts: Cash, cheques, or bank transfers.

Movable Property: Jewellery, shares, and securities, bullion, artworks, etc.

Immovable Property: Land, buildings, or any real estate.

If the entire value of gifts in these categories exceeds Rs 50,000 in a given financial year, the full amount is considered taxable as “Income from Other Sources” and is added to the recipient’s tax liability.

Tax Exemptions on Gift

Although the law mandates that gifts above Rs 50,000 be taxed, there are many exemptions that might help recipients avoid taxation. The key exemptions are as follows:

Gifts from Relatives

Any gifts from a “relative” are exempt from taxation, regardless of their value. As per the Income Tax Act, relatives include:

• Spouse of the individual
• Siblings (brother or sister)
• Parents and Grandparents
• Children (son or daughter)
• Siblings and Parents of the Spouse
• In-laws (son’s wife or daughter’s husband)

For example, if your parents give you gold jewellery worth Rs.1 lakh for Diwali, it is not taxable because it falls under the category of gifts from family or relatives.

Gifts Received on Special Occasions

Gifts received during weddings are also exempted from tax, no matter who the donor is. However, this exemption is only applicable to weddings and not to other special occasions such as birthdays, anniversaries, or festivals such as Diwali.

Gifts from Friends or Non-Relatives

Gifts received from friends or non-relatives are taxed if the total value exceeds Rs.50,000 in a financial year. If the value of such gifts falls within the threshold of Rs.50,000, they are not taxable.

Inheritances

Any property or money acquired through inheritance or a will is not considered taxable income. This includes ancestral properties passed down through the generations.

If you donate gifts to a charitable institution or trust, they are not taxed, and you may be entitled to a deduction of tax under Section 80G, depending on the charitable organization.

Taxation of Employer Gifts During Diwali

During Diwali, It is quite common for employers to give their employees gifts such as vouchers, electronics, or bonus payments. The taxability of these gifts depends on their value and form:

Cash Gifts: If an employer gives cash, it is completely taxable as part of the salary of an employee.

Non-Cash Gifts: Non-cash gifts (such as vouchers, electronic gadgets, or appliances) worth up to Rs.5,000 are exempt from taxes. If the value of non-cash gifts exceeds Rs.5,000, the amount in excess is added to the employee’s taxable salary and taxed at the applicable income tax rate.

Bonus Payments: Any Diwali bonus paid by the company is deemed part of the employee’s salary and hence completely taxable.

Recording and Reporting of Gifts

Keep track of the gifts you get, especially if they are valuable. If the total value of gifts exceeds Rs 50,000, the taxpayer must disclose them as “Income from Other Sources” while filling their income tax return (ITR).

Furthermore, for high-value gifts such as property or luxury items, it is best to properly document the transactions, including the donor’s information, to avoid any scrutiny from the tax authorities.

Conclusion

While Diwali is an occasion of joy and generosity, it is essential to stay aware of the tax implications of gifts. Gifts in India are taxable if they exceed Rs.50,000 in a financial year unless they come from an exempt source, such as relatives or weddings. As a responsible taxpayer, you should be aware of the applicable exemptions and thresholds to avoid unexpected tax liabilities. Celebrate Diwali with love and joy, but make sure you understand your tax requirements.