The festival of lights is around the corner. Diwali is an occasion where you exchange cash or gifts with your family and friends and spread positive vibes to your loved ones. Exchanging gifts on the occasion of Diwali is a part of Indian tradition. While presents are considered a token of love, have you ever thought of these gifts from an income tax perspective? The gifts you receive may not always be tax-free. Although the Gift Tax Act was abolished in 1998, all gifts received during Diwali may not be tax-exempt.

 

Gifting has always been seen as a way for people to express love and affection. With the increased focus on taxation, it becomes imperative to know its taxability, how to disclose it correctly, and maintain documents (gift deeds, property registration etc.) diligently.

 

What do you mean by a gift?

 

A gift can be money received in the form of cash or cheque, immovable property (land or building), and movable property (gold, jewellery, or shares).

The Government founded gift tax in April 1958 regulated by Gift Tax Act, 1958 (The GTA) with an intention to impose taxes on giving and receiving gifts under certain specific circumstances.

 

Gifts in the form of cash, demand draft, bank cheques or anything having a state were covered. Though, the GTA was abolished in October 1998 and made all gifts tax free. However, Gift Tax was reintroduced in a distinct form and included in the Income-tax provisions in 2004.

 

Let us learn on the income tax implications of gifts received at the occasion of festivals.

 

Tax treatment of monetary gifts received by an individual or Hindu Undivided Family (HUF)

 

Monetary limit for exempt gifts

 

 

Gifts from Relatives

 

Diwali gifts received from relatives are fully exempt from tax without any limit, provided such relative comes under the definition of the relative for the purpose of section 56(2). For income tax purposes, here is the list of relationships that will be considered as relatives:

 

 

For instance, if you receive a gift worth Rs3 lakh from your parents this Diwali, you won’t be liable to pay any tax.

 

It is important to remember that, Diwali gifts received from friends will be treated as income from other sources and will be taxed accordingly. However, gifts (either Diwali or any other) up to Rs50,000 received in aggregate during the financial year are exempt from tax.

 

Gifts in the form of immovable property

 

If you receive any property (movable or immovable) for inadequate consideration, the difference between the consideration and the stamp duty value will considered as a taxable gift. In case, the difference between actual value and stamp duty value is less than Rs50,000, the transfer will not be considered a taxable gift.

 

If the stamp duty value of the immovable property exceeds the consideration amount by a minimum of Rs50,000, then the stamp duty is chargeable to tax. 

 

Diwali gifts or Diwali Bonus from employer

 

It is nice to have a considerate employer who gives a bonus or gift for Diwali, but the onus of paying tax on the gifts lies on the employee. Gifts from an employer to employee are taxable as perquisites if their value is more than Rs5,000. The Rs5,000 limit is for an entire financial year. It means the total value of all gifts and bonuses should be below the threshold for them to be tax-free. If the employer doesn’t deduct tax at source (TDS), the employee will need to declare the gift under the head ‘salaries’ in the income tax return (ITR) form. The recipient employee needs to get the fair market value of the gifts and pay tax on them based on his tax slab.

 

If you receive any gift voucher or token worth more than Rs5,000 from your employer on Diwali, then it is treated as part of your salary and taxed according to your tax slab. The tax exemption is limited to gift vouchers or tokens totalling less than Rs5,000 in any given financial year. Therefore, if you receive two vouchers totalling more than Rs5,000 during a financial year then you will be taxed. There is no tax exemption on cash given as a gift by an employer.

 

As an employee, there is some relief if you receive gifts from a business contact in a personal capacity. 

 

Is GST applicable on Diwali gifts?

 

Gifts are not defined in the GST law. In common parlance, a gift is made without consideration, is voluntary in nature and is made occasionally. Gifts upto a value of Rs50,000 per year by an employer to his employee are outside the ambit of GST. However, gifts of value more than Rs50,000 made without consideration are subject to GST, when made in the course or furtherance of business.

 

As per Schedule I, GST shall be levied on the supplies made even without consideration between distinct or related persons. In other words, free supplies/gifts between unrelated persons are not supplies, therefore not taxable.

 

How to avoid 'gift tax'?

 

The best way to avoid 'gift tax' is by avoiding to receive any gift in form of cash or property aggregating more than Rs50,000.

 

In case you do, it is better to invest the gifted money. It not only helps in saving tax but also generating tax-free income under prevailing sections offered under I-T laws in the country, experts suggest.