Got Deepavali gifts? Know their tax implications

India’s two major Hindu festivals Dasara and Deepavali have just passed by and you may have received certain festival gifts from relatives, friends and employers in the form of cash, gold and jewellery, gift vouchers, cash-back coupons, artworks, drawings, financial gifts including health and life insurances, stocks, digital gold, non-fungible tokens and other movable or immovable property. Under these circumstances, the recipient is having an obligation to know its worth and offer it to tax as their income. Now, it is time to find out its tax implications.

Is gift tax still in force?

A question may arise on the existence of a gift tax and if the Central Government did not abolish it back in 1998. Yes, it did. However, tax on gifts has returned to the law in a new form with effect from April 1, 2005, by shifting emphasis from donor-based to recipient-based. In other words, unlike in earlier regimes, certain gifts under specified circumstances will attract taxes in the hands of the recipient. Thus, the donor does not have any tax obligations on the gifts made by him.

Let us have a look at when those gifts are taxable and tax-free and other connected issues:

Definitions

This is how the Income Tax Act 1961 defines various terms related to gifts:

Gift: In simple terms, it is an act of transfer by one person to another of any existing movable or immovable property voluntarily with or without consideration in terms of money or money’s worth.

Relative: According to the Explanations to Section 56 of the Income Tax Act, 1961, the following are considered as ‘Relatives’. Spouse of the individual, brother or sister of the individual, brother or sister of the spouse of the individual, brother or sister of either of the parents of the individual, any lineal ascendant or descendant of the individual, and any lineal ascendant or descendant of the spouse of the individual. It is interesting to note that cousins are not considered as ‘relatives’ as held in ITO v Mahabir Jute Mills (1983) 17 TTJ (All.) 49. The likely reason for exclusion could be the absence of common parents and a relationship that cannot be identified with the concerned individual.

Gifts & Its taxability

From a tax point of view, gifts can be divided into various categories:

The gifts received on the occasion of marriage from non-relatives or friends (if the donor is an employer, then the exemption cap of Rs 5,000 applies); gifts received on the result of will/inheritance excluding rental or other income earned from therein; gifts received in contemplation of the death of the donor; gifts received from a registered trust and any money or property received at the time of partition of HUF are tax-free.

Gifts received only from those specified ‘Relatives’ are fully exempted from income tax. Remember, ‘cousins’ are not specified relatives.

Gifts received from friends are taxable if their value exceeds the aggregate cap of Rs 50,000 in a financial year. These gifts should be disclosed under the head ‘Income from Other Sources’.

Gifts including a bonus received by an employee are taxable only if the aggregate value of such gifts exceeds Rs 5,000 in a financial year. These gifts should disclose as ‘perquisites’ under the head ‘Income from Salary’.

GST perspective

Under GST law, there are slightly different rules. Services by an employee to an employer in the course of or in relation to his employment shall not be treated as a supply of services. However, gifts by his employer exceeding Rs 50,000 in value in a financial year constitute a supply of goods or services or both. For instance, M/s ABC Limited gives Deepavali gifts to its senior-most employees of Rs 75,000 each. Since an employer and employee are considered related persons, such a gift amounts to supply and GST is leviable in its entirety.

Disclosure

The recipient is under obligation to disclose both taxable as well as tax-free gifts in his ‘Return of Income’ – under the Schedule S - Salary or under Schedule OS - Other Sources as the case may be. Similarly, tax-free gifts are to be disclosed under Schedule EI- Exempt Income.

Non-compliance will attract a penalty between 50% to 200%, whether or not it was a wilfull omission. Therefore, it is advisable to disclose them accurately in order to avoid future inquiries and scrutiny by the Income Tax department.

(The author is the founder and chief executive officer of Shree Tax Chambers)