Diwali Gifts, Perquisites and Income Tax Issues

The tax treatment of gifts, including those received on occasions like Diwali, centers on the relationship between the giver and the receiver and the value of the gift. Generally, gifts (cash, movable, or immovable property) received from a non-relative exceeding Rs.50,000 in value during a financial year are fully taxable in the hands of the receiver. However, key exemptions apply to gifts of any value received from specified relatives, received on the occasion of marriage, or acquired under a will/inheritance. While the giver cannot claim a deduction for personal gifts, they can deduct the expense if the gift is recorded as a business promotion expense. Crucially, the giver of goods disposed of as a gift is denied Input Tax Credit (ITC) on those goods under GST rules. Furthermore, if a gift constitutes a benefit or perquisite provided to a resident with business income, the giver must deduct TDS at 10% under Section 194R if the value exceeds Rs.20,000 in the financial year.

Arjuna (Fictional Character): Krishna, on the occasion of Diwali there is a lot of give and take of various Gifts, but is it exempt under Income tax?

Krishna (Fictional Character): Arjuna, there are many taxpayers who gain financially by receiving Gifts on various occasions and Diwali is one of them. There is no Tax Exemption for Gift received from third person if value of Gift exceeds Rs. 50,000.

Arjuna (Fictional Character): Krishna, Which gifts are exempt?

Krishna (Fictional Character): Arjuna, some of the gifts which are exempt, if received, are:

1) Gift received from specified relatives of any amount and any type is exempt.

2) Gift received from person other than relatives e.g. Friends, Cousins, Uncle etc.  For an amount less than Rs. 50,000 is exempt.

3) Gift received on the occasion of marriage from anyone, for any amount is exempt from Tax.

4) All Gift received under will or Inheritance is exempt whatever may be the value.

5) Gifts received by Trust or Institutions Notified under section 12A/12AA/10(23) are exempt.

Arjuna (Fictional Character): Krishna, Wow…!! It means there is no tax on gifts received on diwali also?

Krishna (Fictional Character): Arjuna, not exactly. In simple terms:

Cash gifts: If the total cash gifts you receive during the year are more than ₹50,000, the entire amount becomes taxable.

Gifts in kind (movable assets like gold, electronics, etc.): If the fair market value of such gifts in total is more than ₹50,000 in the year, the entire value becomes taxable.

Immovable property (like land/flat): If the stamp duty value is more than ₹50,000 per property then it’s taxable.

Arjuna (Fictional Character): Krishna, can the person who gives Diwali gifts claim any deduction under the Income-tax Act?

Krishna (Fictional Character): Yes, If the gift is given as business promotion and recorded in the books as business promotion expense, then deduction is allowed to the giver. Keep proper invoices/records of the same. However, if the gift is given in personal capacity, no deduction is allowed.

Arjuna (Fictional Character): Understood, Krishna. Then who pays income tax on these gifts, the giver or the receiver?

Krishna (Fictional Character): The gifts received on the eve of Diwali is taxable in the hands of the receiver who is receiving the same if the value of the gifts exceeds the specified value as discussed earlier.

Arjuna (Fictional Character): But Krishna, what about GST? Can the giver claim Input Tax Credit (ITC) on goods distributed as gifts?

Krishna (Fictional Character): No, if the goods which are distributed and disposed of by way of Gift, the Input tax credit with respect to same is not allowed and it is blocked credit. The value of such gift including the GST will become the cost of the giver.

Arjuna (Fictional Character): Krishna, what if gifts in the form of “perquisites” are provided?

Krishna (Fictional Character): Arjuna, TDS under 194R would be applicable if payments or benefits are given to a resident having Business & Profession Income as “Benefits or Perquisites” in the following cases:

1. Any asset given as benefit or perquisite that may be capital asset in general sense of the term like car, land etc.

2. Free samples of products are provided.

3. Incentives (other than discount, rebate) in the form of cash or kind such as cars, TV, computers, gold coin, mobile phone etc.

4. Sponsor a trip or provide free tickets of events for the recipient and his/her relatives upon achieving certain targets.

Arjuna (Fictional Character): Krishna, what are the limits mentioned in Section 194R for deducting TDS?

Krishna (Fictional Character):  Arjuna, Section 194R requires a person, who is responsible for providing any benefit or perquisite to a resident having Business & Profession Income, to deduct tax at source @ 10% if the value or aggregate of value of such benefit or perquisite provided or likely to be provided to the resident during the financial year exceed Rs.20,000/-

Arjuna (Fictional Character): Krishna, what one should learn from the provisions of gift?

Krishna (Fictional Character):  Arjuna, in today’s age gifts are not given but taken. There are very few people who give gift with self-pleasure and selflessness. Many politicians and tax evaders were taking undue advantage of provisions related to Gift Under income tax Act. Hence by bringing in such oppressive TDS provisions government tried to increase their tax collection. As things received without cost may not always be good, it is said that every person should earn their wealth with hard work and use it. Respect should be given to Gift as it is filled with lots of emotion and are priceless.

(Republished with amendments)