Introduction: As the festive season of Diwali approaches, the exchange of gifts becomes a common practice. However, in the realm of income tax, the receipt and distribution of gifts come with certain implications. In this conversation between fictional characters Arjuna and Krishna, we unravel the complexities surrounding Diwali gifts and their tax treatment.
Arjuna (Fictional Character): Krishna, Diwali is coming in few days, 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: Krishna, Which gifts are exempt?
Krishna: 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 relative eg. 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.
6) Gift received by employee from employer less than Rs. 5000 in a year is exempt from Income tax.
Arjuna: Krishna, but gift is taken by many taxpayers normally and shown in accounts. For Eg: If there is shortage of cash in business, then such practices are used.
Krishna: Arjuna, wait…! Listen to one more important point. If any immovable property received from either non-relative or third person for a consideration less than its market value either by Rs.50000 or 10% of consideration whichever is higher, the difference will be taxable as gift in the hands of buyer. For example: Any land with stamp duty value Rs 10 lakhs is purchased for Rs 8 lakhs then the difference of Rs 2 lakhs is taxable.
Arjuna: Krishna, what if gifts in the form of “perquisites” are provided?
Krishna: 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 car, TV, computers, gold coin, mobile phone etc.
4. Sponsor a trip or provide free tickets of event for the recipient and his/her relatives upon achieving certain targets.
Arjuna: Krishna, what are the limits mentioned in Section 194R for deducting TDS?
Krishna: 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% w.e.f. 1.07.2022 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: Krishna, what are the provisions relating to distribution of gifts under GST?
Krishna: Arjuna, If Gifts or Free Sample are provided, then the Input Tax Credit cannot be claimed on the gifts. However if the goods are provided as Sales Promotion, then Input Tax Credit can be availed.
Arjuna: Krishna, What one should learn from the provisions of gift?
Krishna: 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 from 1st July 2022. 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 priceless.
Conclusion: In conclusion, the discussion between Arjuna and Krishna sheds light on the multifaceted nature of Diwali gifts and their tax implications. From exemptions and limits under income tax to the application of TDS and GST provisions, individuals must navigate these intricacies for a financially sound festive season. As gifts are exchanged, it is crucial to be aware of the legalities surrounding them, promoting a transparent and compliant approach to taxation during Diwali and beyond.
(Republished with amendments)