Understanding Tax On Diwali Gifts: What’s Exempt And What’s Not

Diwali is the time of receiving gifts. However, gifts received may have tax implications depending on the nature of the gift, the amount, and also who you are receiving it from. We take a look.

Gifts Received From Relatives And Non-Relatives 

Under the Indian Income Tax Act, 1961, the taxation of gifts is governed principally by Section 56(2)(x), which draws a clear distinction between exempt and taxable receipts. Broadly, any sum of money or property received without consideration from a non-relative exceeding Rs 50,000 in aggregate during a financial year constitutes taxable income under the head “Income from Other Sources.” 

However, gifts received from specified “relatives,” including parents, spouse, siblings, lineal ascendants, and descendants, are wholly exempt irrespective of value. “The law also accords exemptions in cases where gifts are received on the occasion of marriage, under a will or by way of inheritance, or from certain registered institutions and trusts,” says Tushar Kumar, advocate, Supreme Court of India.

Accordingly, festive gifts exchanged between family members and close relatives remain outside the ambit of taxation, while substantial gifts from friends, business associates, or non-relatives during festivals such as Diwali become chargeable once the cumulative threshold exceeds Rs 50,000. It is this aggregate principle that often catches the unsuspecting taxpayer unawares, for the liability arises not per transaction, but upon the aggregate value crossing the statutory ceiling.

Gifts Received From Employers 

The position assumes a materially different complexion when the donor is an employer. Gifts, vouchers, hampers, or other benefits conferred by an employer upon an employee are treated not as gratuitous transfers but as perquisites arising out of employment and are thus taxable under the head “Income from Salaries” in terms of Section 17(2) read with Rule 3(7)(iv) of the Income Tax Rules, 1962. “However, festive gifts, vouchers, or hampers from an employer are tax-exempt up to Rs 5,000 per year. Gifts of any nature above that are treated as a taxable perquisite. Cash gifts received from an employer are fully taxable, irrespective of amount,” says Pallav Pradyumn Narang, partner, CNK, a chartered accountancy firm. 

Beyond this threshold, the entire value becomes taxable as a perquisite, and the employer is obligated to include the same in the employee’s Form 16 and deduct tax at source accordingly. Conversely, cash gifts or direct transfers, irrespective of amount, enjoy no such exemption and are treated in full as taxable salary. It is therefore imperative for employers to maintain meticulous records and ensure compliance while extending seasonal benevolence, lest such gestures inadvertently create unintended tax exposure for their employees.

To Sum Up

In summation, while the law does not frown upon festive generosity, it subjects it to well-defined fiscal discipline. The dual thresholds: Rs 50,000 in aggregate for non-employment gifts and Rs 5,000 for non-monetary employer-provided gifts, operate as clear demarcations between goodwill and taxable benefit. 

Taxpayers would be well-advised to distinguish between personal and professional sources of gifts, to document the nature and origin of such receipts, and to remain cognizant of the exemption categories recognised by statute. “A festive token from a relative or a modest non-cash corporate gesture may well pass unscathed, but lavish transfers from friends or employers exceeding prescribed limits can attract tax liability in full measure,” says Kumar.