Many people anticipate receiving gifts and bonuses from friends, family, and employers as the festival season draws near. While this period provides excitement and financial opportunity, it is critical to understand the tax ramifications.
Tax Implications on Diwali Gifts
Gifts from Family Members
As Diwali approaches and everyone starts receiving gifts, understanding the nuances of tax exemptions on familial gifts is essential during festive occasions.
Shalini Jain, Tax Partner at EY India, emphasizes, ‘In India, gifts received from relatives, including those during festivals like Diwali, are exempt from tax without any upper limit. The Income Tax Act clearly defines ‘relatives’ to include parents, siblings, spouses, children, and any lineal ascendants or descendants.”
Gifts from Non-Family Members
During this period, many people may get gifts from friends and acquaintances, and it's important to be aware that taxes may be owed.
Shalini, added “Gifts received from non-relatives are exempt from tax up to a total value of INR 50,000 in a financial year. However, if the total value of gifts from non-relatives exceeds this limit, the entire amount becomes taxable.”
Tax Treatment of Diwali Bonuses
For many salaried individuals, receiving a Diwali bonus can significantly enhance their overall earnings. This incentive is usually determined by the employee's pay and performance and is frequently offered by companies as a thank you during the festival season.
It is important for employees to understand that Diwali bonuses are not considered separate or special income. For tax purposes, they are instead categorized as a component of the worker's normal salary. The employee's total taxable income for the year will therefore be increased by the bonus amount.
This highlights the importance for salaried individuals to plan accordingly. To prevent Diwali bonuses from pushing them into a higher tax bracket, Shalini advices, “Salaried taxpayers can avoid being pushed into a higher tax bracket due to their Diwali bonus by reducing their taxable income through investments in options like the Public Provident Fund (PPF), National Pension System (NPS), or other eligible schemes under Section 80C of the Income Tax Act.”
Tips for Managing Taxes on Gifts and Bonuses
1. Maintain Accurate Records: For the purpose of tracking your tax exemptions and preventing overspending, keep thorough records of all presents you receive particularly from non-family members.
2. Utilize Tax-Saving Instruments: You can efficiently reduce your taxable income by investing your bonuses in Section 80C tax-saving instruments.
3. Seek Professional Guidance: If you receive sizable gifts or incentives then seeking advice from a tax expert can help you optimize your financial plan and navigate the complexities of tax laws.
