Christmas and New Year gifts could be taxable

MUMBAI: It's good to have an employer who is generous and offers gifts on occasions such as Diwali, Christmas, or New Year. But expensive gifts from your company also means you will need to pay tax on them. If the value of a gift from the employer is above ₹5,000, it would be taxed as perquisite.

The limit of ₹5,000 is not for each gift. Instead, the value of all gifts combined should not be over ₹5,000 in a financial year for them to remain tax-free. Some companies deduct perquisite tax and deposit it with the authorities. If the employer doesn't do it, the employee will need to pay tax under the head "salaries" when filing income tax returns.

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But what if you receive an expensive gift from a business acquaintance? There is some relief in such cases, according to chartered accountants. "The section that deals with taxation of gifts in the Income-Tax (I-T) Act, specifies items that are taxable when a person receives them in personal capacity," said Naveen Wadhwa, deputy general manager, Taxmann.com.

But there's a limit here, too. The total value of gifts that you receive from anyone other than close family should not be over ₹50,000. Once the combined value of all gifts cross ₹50,000, they will be taxable.

So, if a salaried individual received a mobile phone, for example, he won't need to pay tax on it as such gadgets are not covered under Section 56 of the I-T Act. The section specifies seven items that are taxable. They include drawings and paintings, sculptures, any work of art, archaeological collections, shares and securities, immovable property, and jewellery.

If a person receives any of the specified items as a gift, he will need to find the items' fair market value and offer them for tax under the head "income from other sources".

For professionals, rules differ. Lawyers, doctors, interior decorators, chartered accountants could end up paying tax on gifts from clients and business acquaintances. In most cases, tax authorities would take a call that the gifts were received in a professional capacity.

"Any value or benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession will be taxed," according to the regulations. Authorities don't want to leave any loopholes that individuals can exploit to reduce their tax outgo. There could be a possibility that some professionals can ask for payment of the fee in the form of a gift if it is not taxed.

What should professionals do in such a case? Chartered accountants suggest that it's best to pay tax on any expensive gift they receive. For this, they would need to consider the fair market value of the gift and add the value to their business income. They should do this unless they can explicitly show that the gift received was in a personal capacity.

Gifts are not taxable if a person receives them from a close relative, no matter how expensive. The Income-Tax Act specifies who are considered as close relatives for the purpose of taxation and they include parents, spouse, children, and siblings.