Are the gifts received on Deepawali tax-free in your hands?

Traditionally Deepawali is the major occasion when gifts are given and gifts are received. The items given as gifts vary from just boxes of dry fruit and sweet to valuable like gold and silver coins etc. Majority of the recipients of such gifts are under the impression that such gifts have no income tax implications, which is not true. Let us understand and discuss the implications of gifts received at the occasion of festivals.

Tax provisions about gifts

Though Gift Tax Act was abolished in 1998, where the donor was required to pay gift tax, but gifts tax in different form was introduced in 2004 making certain gifts taxable in the hands of the recipient instead of the donor. Now the donor does not have any tax implications on the gifts made by him. In case total value of all the gifts, in any form, received from all the sources during a financial year exceed  fifty thousand rupees, whole of the amount becomes taxable without any exemption. However, as long as aggregate of all the gifts does not exceed fifty thousand rupees, there is no tax liability for the recipient. All the gifts whether received in cash or as gift voucher or in kind have to be considered for arriving at the threshold.

Exclusions of certain gifts

While arriving at the threshold of fifty thousands, value of gifts received from certain relatives are excluded. Relatives for the purpose of such exclusion include spouse, brothers and sisters of the receiver himself. It also includes brothers and sisters of the spouse. Relative here further includes all the persons who are lineally ascendants of decedents of the recipient. The spouses of all the persons enumerated above are also covered within the definition of relatives. Though the definition of relatives is very vast still it does not include all your relatives.

On the face of it seems that gifts received as well as given to the relatives enumerated above are fully tax exempt and the relationship works both the ways. But if you scrutinise is closely, it is not so. For example any gift received by nephew or niece from their uncles or aunt is fully tax free but the reverse is not true. So the  gifts received by the uncles and aunts from their niece and nephew will not be tax free in their hands if the value of all the gifts taken together is more than fifty thousand rupees in a year. Once the aggregate of all the gifts crosses the threshold of fifty thousand rupees, whole of value of gifts becomes taxable.

Apart from relatives gifts received at the occasion of your marriage and assets received as inheritance are also excluded from the threshold limit. The gifts received from relatives as well as on several occasion enumerated are not treated as your income without there being any limit so you are not even required to disclose it in your ITR.

Gifts received by persons engaged in business or profession

Value of all the gifts received by those engaged in business or profession, in the course of carrying on business or profession are treated as business income without there being any basic threshold limit. Though it is not observed in practice by anybody but strictly speaking value of all gifts including dry fruit and sweet boxes are required to be offered as income for tax as purposes as such gifts represent perquisite received in the course of carrying out the practice of profession.

Tax implications for salaried on the gifts received

Though salaried at the lower level of the organisation receive gifts of small value like boxes of dry fruit and sweet but those who occupy seats of power in any organisation receive costly gifts also, like gold or silver coins. So for those who receive the small gifts of sweet and dry fruit box, the probability of aggregate value of all such gifts exceeding the threshold of fifty thousand is very low but for those who receive costly gifts, the aggregate value may incidentally exceed fifty thousands and thus bring all gifts under the tax net. Strictly speaking such gifts should be offered as income under the head “Income from other Sources.”

Moreover gifts received from employer during the year is exempt upto Rs. 5,000/- in the hands of an employee beyond which it will become taxable and the employer is supposed to deduct tax on such gifts.

Tax implication for neither salaried not self employed on Deepawali

Not only for those who are engaged in business or profession even for those who are not gainfully employed also receive gifts from their elders and friends. In case the elders are not covered within the definition of relatives, such gifts become taxable in case the aggregate of such gifts during the year exceeds the threshold of fifty thousands.

So now are aware that  for all these years who have not been disclosing the gifts received by you in your ITR and which you were supposed to do. From this year onwards, be law compliant and disclose these gifts if you feel you are required to do so.

The writer is a tax and investment expert and can be reached at @jainbalwant@gmail.com