Diwali is one big festival in India when people exchange gifts and pleasantries with family members, relatives, and friends. This is also a time when employers give gifts along with monetary bonuses to their employees. Some e-commerce companies, such as Flipkart and Amazon also give out vouchers and cashback offers during Diwali shopping.
That said, not all of these gifts would qualify as tax-free, and so, it becomes important to be aware of the applicable tax laws on all such gifts and transactions.
What Gift Transactions Are Tax-Free?
Bhai Dooj, which falls on October 26, immediately after Diwali, is one festival when brothers exchange gifts with their sisters and vice-versa.
That said, while gifts from relatives are tax-exempt under the Income-tax Act, 1961, there is also a key distinction in terms of the definition of relative.
Says Sandeep Bhalla, partner, Dhruva LLP, a Mumbai-based tax and advisory firm, “A cousin or a stepbrother may not be covered under the definition of ‘relative’.”
So, such gifts will be tax-exempt if they are less than Rs. 50,000 in value, but the entire amount will be considered taxable if the value exceeds Rs. 50,000.
Other Taxable Transactions
Here are a few other taxable transactions that one should keep in mind.
Cashback, Gift Voucher, Coupons From E-Commerce Websites: You might have received a free gift voucher code or a cashback coupon while shopping from an e-commerce website.
According to Preeti Sharma, partner, global employer services, tax and regulatory services, BDO India, the Indian subsidiary of British accounting, taxation and business advisory firm, BDO, ‘any instant discount’ which results in a reduction in the price payable for any goods/ services is not taxable.
That said, if someone receives a cashback, meaning that at first the full price was paid, but later after the closing of the return window, a cashback was received either in bank debit/credit card or wallet, then the “same cannot be categorised as a discount, and will likely fall under the Gift Tax ambit,” she says.
She adds that if someone receives any gift coupon or voucher that allows them to purchase any product for ‘free’ i.e., without any consideration, “then it would be covered under the gift tax provisions of the Income-tax Act, 1961.”
So, in essence, if you receive any instant discount while buying a product and, as a result, pay a lower price for it, then it would be considered tax-free, but if you receive any cashback after paying the full price of a product and then get another product without paying anything and using a gift coupon/ voucher, then it would be subject to gift tax provisions.
Diwali Bonus, Diwali Gift Coupon/Card Given By Employer: During Diwali, several companies give their employees corporate gift cards, vouchers, and salary bonuses, among others.
Gopal Bohra, partner, N.A. Shah Associates, a Mumbai-based legal and tax advisory firm, says that the Diwali bonus given by companies to their Indian resident employees will be taxable as salary after the specified exemption limit. Besides, the provision of tax deducted at source (TDS) will also become applicable.
However, if one is working for an Indian company’s foreign branch and is receiving his/her Diwali bonus outside India in that foreign branch, then the tax laws will be different.
Bohra explains that in such a situation, residency status, double taxation avoidance treaty (DTAA) and other such related conditions will have to be checked.
Bohra explains that according to Section 9 of the Income-tax Act, 1961, salary is earned where the services are rendered. Therefore, in case of non-resident Indians, who are rendering their services outside India and are receiving a Diwali bonus from their company based out of India, then “it will not be taxable”.
Bhalla says where the monetary consideration of such Diwali bonus, gift voucher, or others is less than Rs 5,000; then there would be no incidence of taxation even if an Indian citizen works in a foreign branch of the company.
Bhalla further says that if the amount is higher than Rs 5,000, then the employee’s stay in India (number of days), residency conditions, and other such related aspects will need to be checked, and one will have to examine when the DTAA provisions became applicable in his/her case. After this applicability is established, the benefits applicable for such bonus would be calculated.
So, in essence, if one is working for an Indian company and he/she is posted to work in its foreign branch, the number of days of stay has to be calculated to check whether he/she satisfies the residential status clauses. What also needs to be checked is whether the country has a DTAA agreement with India.
Using Credit Card Or Reward Points To Gift: Credit card companies award reward points and cashbacks to the cardholder while making purchase on various shopping sites and/or stores.
Sharma explains this with an example. “Suppose Mr. A used his credit card to purchase a product for his friend Mr. B, and then the purchase consideration was paid by Mr. A, not Mr. B, who received the said item, then Mr. B would be subject to gift tax provisions.”
“But if Mr. A receives any cashback in his credit card statement and uses it to purchase any other item, then such transaction would be subject to gift tax provisions,” adds Sharma.
However, if Mr. A had received an instant discount and paid a reduced price for the product, then that discount won’t be taxable, he says.