Don't let this festival season get taxing for you

Gifts from distant relatives, friends and valued more than Rs 50,000 are taxable; from employers, the limit is Rs 5,000

If you have a generous employer like Savji Dholakia, the Surat-based billionaire diamond merchant famous for gifting flats and cars to his employees on Diwali, it could get taxing while filing returns next year. Employees need to pay tax on any gifts received from an employer that has a market value of over Rs  5,000.

“Such gifts are added to income from other sources. The employer deducts tax at source based on the applicable tax slab and deposits it with the income tax department. If the value of the house is Rs  50 lakh, the receiver needs to pay Rs  15 lakh as tax,” says Chetan Chandak, head of tax research, H&R Block India

But if a salaried receives a mobile phone, a tablet or any other gadget that is a trendy gift at present from a vendor or client or business contact, he doesn’t need to pay tax on those. The income tax department has specified the gifts that attract tax if they are not from a close relative. 

These include immovable property, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art.

For those in business or engaged as a professional, taxation of gifts is treated differently. “Any gift they receive is considered as business income,” says Naveen Wadhwa, general manager, Taxmann.com. In this case, gifts are considered as professional receipts or compensation over and above the money paid for the services rendered. These should be added to the income and taxed according to the slab.

Section 28 of the Income-Tax Act lays down what is taxed as business income and includes “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession”. The receiver of such gifts needs to find their market value before declaring them to the tax department.

If the donor is a friend and the gift is received in personal capacity, taxation changes again. Gifts from personal contacts or distant relatives are exempt from tax up to Rs 50,000. The Income-Tax Act lists 10 gifts that need to be declared and the receiver needs to pay tax on these if given in personal capacity. These include cash, bullion, jewellery, shares, financial securities, drawing, paintings and immovable property. These have to be declared under the head ‘income from other sources’ and taxed accordingly. 

You also don’t need to pay tax on gifts received from close relatives, irrespective of their value. Close relatives mean immediate family including parents, siblings, spouse and children. Also, spouse’s parents. Gifts from brother’s or sister’s spouse are exempted. If an individual receives a gift from parent’s siblings, it’s not taxable either. “One should be careful of the definition of a close relative as it can get confusing. A gift received by nephew from his uncle is not taxable but it can be vice versa,” says Wadhwa.