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Why expensive gifts are bad tax news

December 19, 2018 09:00 IST

Tinesh Bhasin explains the tax liabilities that accompany receiving a gift.
Illustration: Dominic Xavier/Rediff.com

Surat diamond merchant Savji Dholakia gifted around 600 cars to his employees as Diwali gift this year.

Some employees also received flats and cash, say reports.

While it's good to have a large-hearted employer, the onus of paying tax on these gifts lies with the recipient employee.

Any gift from an employer to employee is taxable as perquisites, if its value crosses Rs 5,000.

In the income tax return form, these are taxed under the head 'salaries'. The limit of Rs 5,000 is for the entire financial year.

 

"An employee receiving the gift of a car or house has to consider the fair market value of such gifts and pay tax on it based on her/his tax slab. Usually, the employer will deduct the tax at source on such perquisites," says Chetan Chandak, head of tax research, H&R Block.

But if you are an employee who receives a gift from business acquaintances, there's some relief.

The Income-Tax Act specifies a list of items that are taxable if received as gifts.

This includes shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any other work of art, and bullion.

"As an employee, if you receive any gift other than the specified items, you don't need to disclose them in the returns or pay on it," says Naveen Wadhwa, a chartered accountant with Taxmann.com.

As an employee, mobile phones or other electronic gadgets received from vendors or clients will not attract tax.

Things are slightly different for professionals such as doctors, lawyers, chartered accountant, and so on.

Section 28 lays down what is taxed as business income and includes the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

The fair market value of such items received by a business or professional should be added to the business income and tax needs to be paid on it.

Gifts that professionals receive in due course of business are taxable to ensure that they don't receive expensive gifts from clients instead of fees and thereby avoid taxes.

But not all gifts to professionals are taxable. If someone offers a gift in a personal capacity, then the taxation will be different.

In this case, they won't need to pay tax on electronic gadgets, just like the salaried.

Only those item included in the list (shares, bullion, etc) mentioned above are taxable, if the market value of all gifts received in a financial year cross Rs 50,000.

If you receive gifts which are in the specified list, you will need to declare it under the head 'income from other sources' when filing returns and taxed accordingly.

This is true even if it is from a friend or distant relative.

Gifts are, however, not taxable only when the person receives it from close relatives.

The Income-Tax Act says these include spouse, siblings and their partners, siblings of spouse and their partners, brother or sister of either of the parents of the individual and any lineal ascendant or descendant of the person of his/her spouse.

Also, if you are getting married, any gift received during the wedding is free from tax.

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Tinesh Bhasin in Mumbai
Source: source
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