Tax on Diwali and New Year Gifts

Diwali and New Year are some of the key auspicious days that Indians celebrate with their closed ones, joy and laughter. Along with the happiness of celebrating these special days with loved ones, you get the opportunity to receive different types of gifts. But do you know that the gifts you get during New Year's or Diwali are taxable as per law in certain scenarios?

Keep reading to get a comprehensive idea about the tax on Diwali/New Year gifts, whether any exemptions are applicable, and the corporate gifting process.

Diwali and New Year Gifting Traditions

When it comes to enjoying festivities and traditions, Indians have a way of doing these grandly. From following rituals to giving gifts to loved ones, occasions such as Diwali or New Year hold a special place in everyone's heart. 

However, the tradition of giving gifts during Diwali and other activities is not limited to friends and family. A lot of companies make sure to give their employees something during Diwalis or New Year's as a token of appreciation. It may be a small box of sweets or an additional month’s salary.

However, if you receive gifts in such circumstances, you might become liable to pay tax in some specific cases. As per the Indian Income Tax Act, 

• Individuals receiving gifts from specified relatives are entirely exempted from tax, irrespective of the value. 
• If you receive gifts from non-relatives in a financial year whose aggregate sum exceeds Rs.50,000, the total amount will be taxable.
• In the case of gifts from an employer, gift up to Rs. 5,000 in a financial year is exempt, if the amount exceeds Rs. 5,000 then the whole amount received will be taxable.

Now, let's understand the tax on Diwali/New Year gifts.

Types of Gifts Covered

According to the Income Tax Act, a ‘gift’ is when someone gets money or property from another person or organisation without giving any consideration in return. In legal language, the giver is called the donor, and the person receiving the gift is called the donee.

From the point of view of tax on Diwali gifts, the items that are classified as gifts as per the Income Tax Act are as follows:

• Receiving money through cash, draft, cheque, or bank transfer (referred to as “sum of money”).
• Getting immovable property like land, buildings, or residential/commercial property.
• Receiving movable property such as jewellery, shares, bonds, paintings, sculptures, and so on.

Tax Implications of Diwali and New Year Gifts

Usually, giving and receiving presents is a significant element of Indian culture. Even though, in most cases, the aggregate amount of the gift is nominal, in some cases, the value of the gifts becomes substantial. Hence, to give a clear picture regarding the taxability of such gifts, the Income Tax Act of 1961, states the following:

Whether you get gifts from family or non-family members makes a lot of difference. To make things clear, regarding the taxability of gifts received from non-relatives, refer to the below explanations:

• If you receive any sum of money from non-relatives in a year, you won't have to pay income tax on them if the total value is up to Rs.50,000. But if it's more, let's say, Rs.51,000 or above, then you'll have to pay income tax on the entire amount.
• If you receive any real estate properties, like houses or land, from anyone apart from your family, you'll need to pay income tax based on the property's stamp duty value if the stamp duty value is more than Rs.50,000.
• If you receive gifts like jewellery, shares, artworks, archaeological collections, silver, gold, or similar things in a year, and their total market value goes beyond Rs.50,000, you'll have to pay taxes on them.

It is also to be noted that in the case of sum of money and movable property, the limit of Rs. 50,000 is to be applied to the aggregate value of the gifts received during the year, whereas in the case of immovable property, the limit of Rs. 50,000 is to be applied per property.

Taxability of Gifts from Relatives

When you think about tax on New Year gifts in India, the first thing that strikes is the gift received has to be from a non-relative. If it is from a relative, the entire amount of the gift is exempted from tax. But who are considered as relatives?

Well, relative in case of analysing tax implications on gifts includes the following people:
For individuals - 

• Parents of the individual
• Spouse of the person
• Sister or brother of the person
• Sister or brother of the spouse of that person
• Any descendant or lineal ascendant of the individual
• Any descendant or lineal ascendant of the individual's spouse.
• The spouse of the individual referred to above

For HUF (Hindu Undivided Family) - 

• Any member of the HUF

Taxability of Gifts from Non-Relatives

If you are receiving gifts from any individual apart from the ones stated above, the gift will be considered a gift from a non-relative. Tax on New Year gifts in India and other occasions will be applicable if you receive it from a non-relative. To understand the tax process, read below:

Tax Exemption for Gifts Received from Non-relatives

Even though most gifts received from non-relatives are taxed, there are certain scenarios, when the gift is not taxable as per law, even if received from non-relatives. Following are the examples of such situations:

• Received at the time of marriage
• Received through a will or inheritance.
• Received in contemplation of death of the donor.
• Received from a local authority as defined in Section 10(20) of the Income-tax Act.
• Received from funds, universities, foundations, hospitals, educational institutions, trusts, medical institutions, or institutions mentioned in Section 10(23C). (Starting from Assessment Year 2023-24, this exemption doesn't apply if a specified person mentioned in Section 13(3) receives the money.)
• Received from an institution or trust that is registered under Section 12A, 12AA, or Section 12AB. (Starting from Assessment Year 2023-24, this exemption doesn't apply if a specified person mentioned in Section 13(3) receives the money.)
• Received by trusts, funds, institutions, educational institutions, universities, medical institutions or hospitals mentioned in Section 10(23C)(iv)/(v)/(vi)/(via).
• Received as a result of the amalgamation or demerger of a company, or even reorganization of a cooperative bank under Section 47. 
• Received with regard to expenditure actually incurred on his medical treatment or treatment of any member of his family, for any illness related to COVID-19 subject to such conditions
• Received by the family members of deceased employee by employer or such other perosn, subject to following conditions:
  • Death should be caused due to covid
  • It should be received within 12 months of death
  • In case of gift from other persons, the amount should not exceed Rs. 10 lakhs.

Taxability of Gifts from Employers

Employer gifts are not taxable if the total value in a year is less than Rs.5,000. If gift amount exceeds Rs. 5,000 then whole of the gift amount should be taxable.

For example, if you receive three Rs.3,500 presents from your company in a year, the total gift value is Rs.10,500, and you must pay tax on it. This is classified as a ‘perquisite’ in tax records and is taxed.

However, if the entire value of your employer's gifts is less than Rs.5,000, no tax on Diwali gift is due.

Final Words

Overall, while Diwali and New Year festivities in India are full of delight and traditions, it is essential to be mindful of the tax consequences regarding receiving gifts. The Income Tax Act specifies the taxability of gifts, distinguishing between those from relatives and those from non-relatives.

It is important to understand that tax on Diwali gift is very important. Therefore, not disclosing the amount can result in severe actions against you. So keep yourself informed with all the notions by reading all the points discussed above.