Diwali Gift Tax: Do You Need To Pay Tax On Gifts And Bonuses This Diwali?

Diwali is a time of joy, tradition, and exchanging gifts with loved ones. Gifts on this occasion often symbolize the closeness of relationships, and companies, too, commonly give bonuses or presents to employees to celebrate. However, under the Income Tax rules, some of these gifts could come with a tax liability. Here’s what you need to know about the tax implications of Diwali gifts and bonuses.

When Do Diwali Gifts and Bonuses Become Taxable?

According to the Income Tax Act of 1961, Diwali gifts or bonuses that exceed certain thresholds may be subject to tax. Specifically, Section 56(2)(x) outlines that gifts received by an individual may incur tax liability if their total value exceeds ₹50,000 in a financial year. In such cases, the collective value of all gifts over this threshold will be added to your income and taxed accordingly.

Tax-Free Gifts: When Gifts Are Exempt from Tax

Certain types of gifts and sources are exempt from gift tax under the Income Tax Act. Here are some situations where gifts are tax-free:

Family and Close Relations: Gifts received from close family members, including spouses, siblings, and other close relatives, are exempt from taxation.

Inheritance or Will: Gifts received through inheritance or under a will are also tax-free.

Hindu Undivided Family (HUF): Gifts given by any member of an HUF are exempt from tax.

Specified Institutions: Gifts from local authorities like panchayats or municipalities, as well as certain foundations, universities, religious, and educational institutions, are not taxable.

Company Gifts and Bonus Tax Rules

For salaried employees, gifts from employers can also be tax-free, up to a certain amount. If a gift from your employer does not exceed ₹5,000 in a financial year, it is exempt from tax. However, if the gift value goes beyond ₹5,000, the excess amount is considered a part of your salary income and is taxed accordingly.

Important Points to Remember

• Threshold for Tax-Free Gifts: Only gifts within the ₹50,000 threshold from non-exempt individuals remain tax-free.
• Combined Value: Tax on gifts is calculated based on the total value of all gifts received in a financial year, not on each individual gift.
• Employer-Sponsored Gifts: Gifts or bonuses exceeding ₹5,000 from an employer will be added to your income and taxed as part of your salary.

Knowing these guidelines can help you understand when a Diwali gift is purely a reason to celebrate—and when it might come with an added tax obligation. Enjoy the festive season with this clarity on Diwali gifts and potential tax liabilities!