Diwali gifts: Taxable or tax-free? 3 rules for a hassle-free festival

Though gifts are typically seen as tokens of goodwill and gratitude, numerous countries have tax implications linked to gift transactions. The precise guidelines and laws governing gift taxation can differ according to the jurisdiction, yet certain overarching principles are generally applicable.

Gifts received from relatives during Diwali are entirely exempt from taxation under the Income Tax Act, whereas gifts from non-relatives exceeding ₹50,000 are subject to taxation and categorized as “Income from other sources”. Here’s a concise overview of the Diwali gift tax regulations:

• Gifts from relatives: Presents received from designated relatives, such as your spouse, siblings, parents, grandparents, and their spouses, are entirely exempt from taxation as per 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 surpasses ₹50,000 within a fiscal year.

How do you define “relative”?

Your definition of “relatives” may not be synonymous with how taxmen define this term. The term “specified relatives” eligible for tax exemption encompasses:

• Spouse
• Siblings
• Parents and grandparents
• Spouses of parents and grandparents
• Lineal ascendants and descendants (such as children, grandchildren, great-grandchildren, etc.)
• Spouses of lineal ascendants and descendants

Defining gifts and their valuation

When it comes to tax assessment, the value of gifts is generally established based on the fair market value of the given property at the moment of transfer. This evaluation can be intricate, particularly when dealing with non-monetary assets like real estate or artwork. Gift taxation encompasses the acquisition of the following assets:

• Shares and securities
• Jewellery
• Archaeological collections
• Drawings
• Paintings
• Sculptures
• Any work of art
• Bullion

Gifts of assets not included in the aforementioned list, even if they surpass ₹50,000, will remain exempt from taxation. However, the receipt of cash or immovable property valued at more than ₹50,000 will also be subject to taxation.

Tax liability on gifts given or received

A lot depends on whether you received gifts from relatives or those termed as “non-relatives”. However, for clarity, the Income Tax Department has set down the following guidelines to decide and determine tax liability on gifts given or received during festivals.

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

Concealing information about gifts can be costly

It is common for people to not disclose information about the gifts received or given out during festivals. Not providing this information may lead to penalties amounting to as much as 200 per cent of the received sum. Here are some essential points to keep in mind:

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

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

• Maintain precise records of all received gifts, including their date, value, and the giver.
• If you receive a substantial gift, consider dividing it into smaller amounts to avoid surpassing the ₹50,000 threshold.
• Submit your income tax return promptly and accurately disclose all taxable gifts.

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

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Updated: 11 Nov 2023, 01:40 PM IST