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Taxes Should Not Stop You From Gifting

Gifting is considered a noble act because through this people put others over themselves. However, wherever exchange of gifts is involved, tax implications come into picture

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Diwali festival is on our doorsteps and our country is in gift-giving mode. Some of us are already shopping for it while some others are still planning it. Exchanging gifts on festivals is an integral part of our tradition. Gifting is considered a noble act because through this people put others over themselves. However, wherever exchange of gifts is involved, tax implications come into picture.

Sometimes, your gifts can put unnecessary tax burden on you or your loved ones. Nevertheless, this shouldn't deter you to express your love through giving gifts to your friends, colleagues and relatives. If you understand how tax rules apply on gifts, you will be able to work around them.

Pankaj Gupta and his wife Sunita Gupta are busy shopping for Diwali. Pankaj who is an entrepreneur and Sunita who is a housewife have a long shopping list as they have to buy gifts for their children, other family members, employees and clients. Pankaj is slightly worried because he isn't fully aware of the tax implications of gifts. Let's help him unlock his tax troubles.

Taxability of gifts

Government also understands the importance of interchange of gifts between people and therefore our tax laws give a minimum exemption of Rs 50,000 on all types of gifts. However, in most cases if the value of gift(s) exceeds Rs 50,000 in a year then not just the amount exceeding the minimum exemption limit but the whole amount received as gift becomes part of receiver's income. For example, if Pankaj receives a gift worth Rs 55,000 from a friend, then the whole value of the gift, i.e. Rs 55,000 will be added to his taxable income rather than Rs 5,000. However, gifts to family members are taxed in a different way.

Tax on gifts to family members

When exchanging gifts with the relatives this Diwali, Mr and Mrs Pankaj should keep certain things in mind. Most of the gifts given to relatives are not taxed in individual's hand or relative's hand. Therefore, Income Tax Act clearly defines who can be considered your relative for the purpose of taxation. Your parents, siblings of your parents, your spouse, your siblings, your in-laws and their spouses, any of your lineal ascendants and descendants come under the category of relatives as per the law.

Tax on gifts to children

If you gift any asset to your child who is beyond the age of 18 years then any income arising from it will be taxable in his hand. However, income earned by assets gifted to minor children by parents is clubbed with the income of parent with higher income. Suppose that you gift your child (who is a minor) a fixed deposit of Rs 10 lakh then any interest income arising from it will be considered either your income or your spouse's income (whoever earns higher between the two).

Tax on gifts given to spouse

Like many people even Pankaj has a misconception that he can save tax by giving gift to his wife Sunita. Although any gift given by an individual to either his spouse or his son's spouse is not included in the income of the individual for taxation, but any income earned from such gift is clubbed in the individual's income according to the provisions of law. So such gifts will be taxed in Pankaj's hand irrespective of the nature of the gift (whether cash or kind).

If Pankaj gifts an F.D. worth Rs 10 lakhs to his wife Sunita then this will not be clubbed in his hands. However the interest income earned from this F.D. will be clubbed in his income. Now, if Sunita receives interest income from F.D. and invests this amount somewhere else then any income that she earns from such investment will be considered as her own income.

Gift from child to parent

Gift from a child to a parent is tax free for the child as no clubbing provisions are applicable in this case. Any asset received by a parent from the child and income derived from it is taxable for the parent only. Since parents are considered relatives as per tax laws so any gift received by them in cash is free from tax.

Tax on gifts to corporates

As a business owner, Pankaj also needs to send Diwali gifts to his business partners and employees. Here Pankaj needs to know a few things. Any expenses on gifts given to his clients can be claimed as business expense and will not have any tax implication for him or his company. On the other hand, gifts will be taxable for the clients only if the value of such gifts exceeds Rs 50,000. Similarly, he can give Diwali gifts to all his employees less than Rs 5,000 without any tax implications for his employees.

So just like Gupta family, when you exchange gifts with your relatives this festive season, remember these important points so that you and the ones you care for relish the experience.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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taxation diwali Gifting income tax

Vaibhav Sankla

Vaibhav Sankla is the Director of Strategy and Business Development at H&R Block India. He has more than 15 years’ experience in taxation and accounting

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