Diwali gifts: Taxable or tax-free? Decoding the rules for a hassle-free festival

Although gifts are generally seen as tokens of goodwill and gratitude, many countries have tax implications associated with gift transactions. The exact guidelines and laws governing gift taxation may vary by jurisdiction, but certain overarching principles are generally applicable.

Gifts received from relatives during Diwali are completely exempt from taxation under the The Income Tax Actbut gifts from non-relatives prevail ₹50,000 is subject to taxation and is in the category of “Income from other sources.” Here is a precise overview of Diwali gift tax regulations:

• Gifts from relatives: Gifts received from designated relatives, such as spouses, siblings, parents, grandparents, and their spouses, are fully exempt from taxation in accordance with the provisions of the Income Tax Act, 1961.
• Gifts from non-relatives: Gifts from individuals who are not close relatives are subject to taxation categorized as “Income from Other Sources” when the cumulative value of gifts exceeds ₹50,000 within a fiscal year.

How do you define “relationship”?

Your definition of “relatives” may not be the same as how tax preparers define this term. The term “specified relatives” eligible for tax exemption includes:

• Spouse
• Brothers
• Parents and grandparents
• Spouses of parents and grandparents
• Ancestors and lineal descendants (such as children, grandchildren, great-grandchildren, etc.)
• Ancestral spouses and lineal descendants

Defining gifts and their valuation

For tax assessment, the value of gifts is generally established based on the fair market value of the property given at the time of the transfer. This evaluation can be complicated, especially when dealing with non-monetary assets such as real estate or artwork. Gift taxation covers the acquisition of the following assets:

• Shares and securities
• Jewelery
• Archaeological collections
• Drawings
• Paintings
• Statues
• Any work of art
• Bullion

Gifts of assets not included in the aforementioned list, even if they exceed ₹50,000, still exempt from taxation. However, get cash or immovable property worth more than ₹50,000 will also be subject to tax.

Tax liability on gifts given or received

Much depends on whether you have received gifts from relatives or from people known as “non-relatives”. However, for the sake of clarity, the Income Tax Department has laid down the following guidelines for determining and tax liability on determining gifts given or received during festivals.

• In one fiscal year, gifts are received from non-relatives up to ₹50,000 is exempt from income tax. However, if the amount exceeds this threshold, such as 51 thousand or more, income tax will be applicable on the entire amount received.
• If you transfer real estate, be it land or a house, to a family member or anyone else, you will have to pay income tax based on the stamp duty value of the property. If the property exceeds the stamp duty value ₹50,000, income tax liability will be incurred.
• If you receive gifts such as jewellery, works of art, shares, archaeological collections, gold, silver, or similar assets in a particular fiscal year, and if their market value exceeds ₹50,000, you will be liable to pay taxes on them.

Hiding information about gifts can be expensive

It is common for people not to disclose information about the gifts received or given out during festivals. Failure to provide this information may result in penalties of up to 200 percent of the amount received. Here are some essential points to keep in mind:

• Gifts from specified relatives, such as spouses, siblings, parents, grandparents, and their spouses, are completely exempt from taxation in accordance with the Income Tax Act.
• Gifts from non-relatives become taxable under the category “Income from other sources” if the total value of the gifts exceeds ₹50,000 in a financial year.
• Even if a gift comes from a relative and surpasses it ₹50,000, it is essential to include it in your income tax return.
• Failure to report taxable gifts may result in penalties equal to 200 percent of the amount received.
• When you are unsure about the tax status of gifts, it is advisable to consult a tax advisor to ensure that your specific tax obligations are met and to avoid penalties.

Here are some additional suggestions to prevent penalties related to undisclosed gifts:

• Keep accurate records of all gifts received, including their date, value, and the giver.
• If you receive a substantial gift, consider dividing it into smaller amounts so that you don’t end up with the gift ₹50,000 threshold.
• Submit your income tax return promptly and accurately disclose all taxable gifts.

Gifts are always loved and appreciated, especially from those close to your heart. However, tax personnel think differently, which is why you need to be careful about the value of the gift received or sent, whether to and from “specified relatives” or “non-relatives”.

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Updated: 11 November 2023, 01:40 PM IST