Diwali, the joyous occasion when Indians fervently give and receive presents as a way of saying hello, is quickly approaching. Among others, presents from friends, family, and employers are given during this time. But do the current laws exempt the donations from taxes?
Gifts are not always tax-free; depending on their value and the recipient’s relationship to the giver, there may be tax ramifications. The Income Tax Act of 1961’s Section 56(2) establishes a number of guidelines on the taxation of gifts and the circumstances under which they are exempt.
Here’s a look at the norms.
Are gifts from friends subject to taxes?
A person’s “income from other sources” category includes presents from friends. Therefore, in order to compute the tax, its value must be added to one’s income.
But only in the event that the donation received exceeds ₹50,000 does this restriction take effect. Tax burden is not incurred if the gift amount is less than ₹50,000.
Also, it is important to remember that presents given by friends on a marriage anniversary are tax-free as India’s festival season coincides with the wedding season.
Are gifts from employers exempt from taxes?
Gifts from the employer are only exempt from taxes if the total amount given to them throughout a fiscal year does not exceed ₹5,000.
For example, a person may receive three presents totaling ₹2,000 from their company in a given fiscal year. The total gift amount in this case will be ₹6,000, which means it will be subject to taxes. According to the tax documents, the amount is subject to tax because it falls under “prerequisites.”
what about family gifts?
These gifts are only exempt from taxation if the recipient satisfies the Income Tax Act’s definition of “relative.”
(A) spouse of the individual;
(B) brother or sister of the individual;
(C) brother or sister of the spouse of the individual;
(D) brother or sister of either of the parents of the individual;
(E) any lineal ascendant or descendant of the individual;
(F) any lineal ascendant or descendant of the spouse of the individual;
(G) spouse of the person referred to in items (B) to (F)
On the other hand, family presents are only tax-free if their total value for the fiscal year doesn’t go above ₹50,000.
Further, the gifts received on certain special occasions are exempt from tax. Such special occasions include:
• Wedding
• As per a Will
• By way of inheritance or in contemplation of death of the payer
• Gift received from the local administration
• Gift received from any educational institution under Section 10 (23)
• Gift received from the charitable organisation