Diwali, the festival of lights, is an occasion where you exchange cash or gifts with your family and friends and spread positive vibes to your loved ones. But, have you ever thought of these gifts from an income tax perspective? The gifts you receive may not always be tax-free. You may be required to pay taxes on some of them. 

Although the Gift Tax Act was abolished in 1998, all gifts received during Diwali may not be tax-exempt.

Section 2 (24) of the Income-Tax (I-T) Act deals with gifts received that will be treated as a person's income, while Section 56 (2) deals with both the taxation and exemptions on them.

In case the total value of all the gifts, in any form, received from all the sources during a financial year exceed fifty thousand rupees, the whole of the amount becomes taxable without any exemption. However, as long as the aggregate of all the gifts does not exceed fifty thousand rupees, there is no tax liability for the recipient. All the gifts whether received in cash or as a gift voucher or in-kind have to be considered for arriving at the threshold.

Gifts from relatives- Exemptions, Tax implications

Gifts amounting up to fifty thousand, received from certain relatives is excluded. Relatives for the purpose of such exclusion include spouse, brothers, and sisters of the receiver himself. It also includes brothers and sisters of the spouse. Relative here further includes all the persons who are lineally ascendants of decedents of the recipient. The spouses of all the persons enumerated above are also covered within the definition of relatives. Though the definition of relatives is very vast still it does not include all your relatives.

Gifts received from friends and others

Diwali gifts received from friends will be treated as income from other sources and will be taxed accordingly. However, gifts (either Diwali or any other) up to Rs 50,000 received in aggregate during the financial year are exempt from tax.

Gifts received from the employer

As per the Income Tax Act, if an employer offers any gift voucher in kind or cash amounting to less than Rs 5,000 during the financial year, then it is wholly exempt. However, if the amount of gift exceeds Rs 5,000, then the whole amount is treated as part of salary and taxed as 'perquisite' according to one’s tax slab.

Gifts received by persons engaged in business or profession

Value of all the gifts received by those engaged in business or profession, in the course of carrying on business or profession is treated as business income without there being any basic threshold limit. Though it is not observed in practice by anybody strictly speaking the value of all gifts including.

So, things like dry fruit and sweet boxes are required to be offered as income for tax as purposes as such gifts represent perquisite received in the course of carrying out the practice of the profession.