It is Diwali time, and many would be excited to receive gifts from family and friends. It is the occasion to spend plenty money and many would be busy purchasing different sorts of gifts like jewelries, vehicles, houses and many more. Some would prefer to give cash as well as other gifts to loved ones. Exchange of gifts during the festive season is, of course, a given. 

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Archit Gupta, Founder & CEO ClearTax said, "Gifts, no doubt kindle enormous excitement in the recipient but one also needs to know the tax implications such gifts could have."

The income tax implications on receiving gifts have been briefly discussed in this article. Gifts could take the form of either cash or kind. Here are the tax implications under both scenarios as per ClearTax. 

Cash gifts

Gifts received in the form of cash are generally tax-free. However, that is not the complete story. Taxability of cash gifts would arise only if the amount of cash received is more than Rs 50,000, in which case, the entire receipt would be subject to income tax.

Gifts in kind

Gifts in kind could either be in the form of immovable property like land, a house, etc., or in the form of movable property like shares, jewellery, etc. 

When it comes to  taxing immovable property received as a gift, the law draws reference to Stamp Duty Value or SDV. Such SDV is the value of the property adopted by stamp valuation authorities for determining the stamp duty. Therefore, according to the tax laws in India, if the SDV of the property received as a gift is more than Rs 50,000, such receipt would be taxed otherwise, it would remain tax-free.

Moving over to a scenario where a movable property has been received as a gift, the Fair Market Value (FMV) comes into play for taxability of such receipt where, if the FMV exceeds Rs 50,000, the gift would be taxable otherwise, it remains tax-free.

In all the cases mentioned above, gifts, if taxed, would be taxable as “Income from Other Sources”.

Exceptions

They say there is an exception to every rule, and so is the case with the rule on taxability of gifts too. Let’s take a look at some exceptions:

  • Gift received from any relative (spouse, mother, father, brother, sister, etc.) is tax-free irrespective of the quantum and the nature of the receipt
  • Gift received under inheritance is tax-free.
  • Any gift received on the occasion of one’s marriage is tax-free

Income tax on gifts - in the hands of the donor

So far, we have discussed the tax implications of a gift in the hands of the recipient. However, it is equally important to also understand that an act of gifting could have tax implications in the hands of the person giving such gifts too. 

There are certain specific circumstances defined under the tax laws when the concept of “clubbing of income” gets triggered. Let us understand clubbing with the help of a simple example. 

Let’s assume that a salaried man gifts his wife some money, she subsequently invests the money in a fixed deposit; which generates income for her in the form of interest. 

The wife has no other source of income. In this case, the initial act of gifting has no tax implications as the wife qualifies as a “relative” and gifts to relatives are tax-free.

However, since the wife has no taxable income, the interest income generated out of the deposit would be clubbed in the hands of the husband and he will have to pay taxes on the same.

Thereby, if you have received any of the above mentioned gifts, make sure to note that they come up with tax implications, hence make sure to save on them as well.