Your Diwali gift and bonus can be taxable: Know ways to avoid it

Exchanging gifts is a common practice in India during the festive season. What many people might not be aware of is that these gifts can have tax implications, unless they fall under specific exempted categories. So, whether you've already received gifts or are expecting them this Dhanteras and Diwali, it's crucial to understand how taxes come into play.

The tax treatment of gifts is governed by Section 56(2) of the Income-Tax Act, 1961. Let's delve into the details:

According to the Income Tax Act, if an employer offers a gift voucher or cash amounting to less than ₹5,000 in a financial year, it is entirely exempt from taxation. However, if the gift's value exceeds ₹5,000, the entire amount is treated as part of your salary and taxed according to your tax slab.

It must be noted that bonuses (irrespective of the amount received) will also be taxable under the head salaries. The amount that will be taxable will be calculated by subtracting ₹5,000 from the value of the gifts and then adding the amount of bonus received.

Gifts from relatives are entirely exempt from tax, with no specific limit, provided the donor qualifies as a relative as defined for tax purposes. This includes parents, siblings, and spouses.

Gifts received from friends are categorised as 'income from other sources' and taxed accordingly. Tax becomes applicable when the aggregate value of gifts received during a year exceeds ₹50,000. As long as the gifts you receive stay within this threshold, you won't incur any tax liability.

Gifts received on the occasion of marriage are not subject to taxation. However, apart from marriage, there are no other exceptions for monetary gifts received by an individual.

If you receive any property, whether movable or immovable, for an inadequate consideration, the difference between the consideration and the stamp duty value is considered a taxable gift. If the difference is less than ₹50,000, the transfer is not treated as a taxable gift.

The most effective way to sidestep 'gift tax' is to avoid receiving gifts in the form of cash or property that exceed ₹50,000. If you do receive such gifts, it's advisable to invest the gifted amount. This not only helps you save on taxes but can also generate tax-free income, thanks to the prevailing sections offered under India's income tax laws, as suggested by experts.