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Published: November 10, 2023
Updated: November 10, 2023

Unlocking Diwali Gifting: Tax Implications and Exemptions

Festive season delight is in the air as Diwali approaches, and with it comes the tradition of exchanging gifts among friends, relatives, and colleagues. But in the realm of taxation, these heartwarming gestures can carry various implications. It's crucial to demystify the tax rules surrounding Diwali gifts, and Business Standard is here to unravel the secrets for you.

Understanding the Taxation of Diwali Gifts

Diwali gifts and their tax implications are regulated by the Income Tax Act. The key factor to consider is the relationship between the gift giver and the recipient. Let's explore the intricacies of Diwali gift taxation.

Gifts from Specified Relatives: Tax-Free

Gifts received from specified relatives, which include your spouse, children, grandchildren, parents, grandparents, siblings, and their spouses, are entirely exempt from taxation, regardless of their value. For instance, if you receive a cash gift of Rs. 1 lakh from your husband during Diwali, it falls under this exemption, and you won't be liable to pay any tax.

Gifts from Friends and Colleagues: Taxable Over Rs. 50,000

Gifts from non-relatives, like friends and colleagues, have different rules. If the aggregate value of gifts received from non-relatives during a financial year exceeds Rs. 50,000, the entire sum becomes taxable under "Income from Other Sources" at your applicable tax rate. For example, if you receive a cash gift of Rs. 60,000 from a friend during Diwali, you will need to pay tax on the entire amount, as it surpasses the Rs. 50,000 threshold. Gifts can be in the form of cash or kind, including jewellery, electronics, home appliances, vouchers, or gift cards. To put it into perspective, if you receive a gold bracelet worth Rs. 40,000 from a colleague, there's no tax liability. However, if another colleague gifts you a Bluetooth speaker worth Rs. 15,000, you would be required to pay tax on the full Rs. 55,000, as it exceeds Rs. 50,000.

Gifts from Employers: Taxable with a Rs. 5,000 Exemption

Gifts from your employer are categorized under "Income from salary" and are taxable. However, there's an exemption of up to Rs. 5,000 in a financial year for gifts received from your employer. If the value of the gift exceeds this limit, you would need to pay tax on the surplus amount. For example, if you receive a cash gift of Rs. 4,000 from your employer during Diwali, it remains tax-free. But if the gift is worth Rs. 6,000, you will be liable to pay tax on the additional Rs. 1,000.

Implications of Section 194R: Businesses and Gift Tax

Businesses often give gifts to their customers, vendors, and associates during Diwali. Section 194R is crucial in such cases and mandates a 10% Tax Deducted at Source (TDS) when the value of the gift exceeds Rs. 20,000. For instance, if a company gifts a TV worth Rs. 1 lakh to a dealer, TDS of Rs. 10,000 must be deducted and deposited with the government.

Exempted Gifts: Love and Celebrations

Some gifts are entirely exempt from taxation, irrespective of their value. These include gifts received from relatives like parents, siblings, and grandparents. Gifts received during weddings are also exempt from taxation, extending not only to the marrying couple but also to their families. These gifts are seen as expressions of love and carry no income tax obligations.

Maintain Records for Tax Compliance

Lastly, it's advisable to keep records of the gifts you receive, especially if they hold significant value, to adhere to tax regulations. As the festival of lights approaches, understanding the tax implications of Diwali gifts is essential to ensure a joyful and tax-compliant celebration. Remember, gifts from specified relatives and those received during weddings are your tax-friendly allies. Gifts from friends, colleagues, and employers may have tax obligations, so staying informed is the key to a delightful Diwali.