Excited for Diwali gifts? Understand the tax implications ahead

Diwali 2024: As Diwali is here, are you excited to receive gifts for the celebrations? Well, the gifts you get can impose additional taxes on you.

According to the Indian Income Tax Act, the taxability of gifts can vary significantly based on their source and value.

What taxes apply to gifts from employers?

If your employer is offering gifts, vouchers, and bonuses for Diwali, it’s important to understand how these can affect your income tax for the year. Gifts received from employers are exempt from tax only if their total value within a financial year does not exceed Rs 5,000.

If the total amount surpasses this threshold, the entire gift amount becomes taxable. For instance, if an employee receives three gifts valued at Rs3,500 each from their company over the year, the cumulative total would be Rs 10,500, making the entire amount subject to tax as a ‘perquisite’ in tax records.

However, if the total value of the gifts remains below the Rs 5,000 threshold, no tax is due.

What strategies can employees use?

If given an option, working professionals can opt for non-cash gifts valued at Rs 5,000 or less, as this can help avoid any additional tax liability. Employers may offer options like gift vouchers that, if kept within this limit, remain tax-free.

Additionally, discussing with your employer the possibility of structuring gifts to include a mix of cash and non-cash items can be beneficial.

Furthermore, employees might consider suggesting traditional treats, such as son papdi or other festive sweets, which not only hold cultural significance but also lack a direct monetary value, thus not impacting tax calculations.

How do other gifts impact taxes?

The classification of the gift-giver is equally important when considering tax implications. Gifts received from specified relatives such as parents, siblings, and spouses are entirely exempt from tax, irrespective of their value.  

However, if an individual receives gifts from non-relatives that total Rs 50,000 or less in a financial year, those gifts remain untaxed.

Yet, any amount exceeding this limit becomes fully taxable, impacting those who receive substantial gifts during festive celebrations.

The types of gifts also play an important role in determining taxability. Cash gifts, which include money received through cash, cheques, or bank transfers, become taxable if the total exceeds Rs50,000 in a year.

Similarly, gifts of immovable property, such as land or buildings, attract tax based on their stamp duty value if that value exceeds Rs 50,000. Moreover, movable properties like jewellery, shares, and artworks are taxable if their total market value surpasses the Rs 50,000 threshold.