Although the Gift Tax Act was abolished in 1998, all gifts you receive during Diwali or any other festival may not be tax exempt. Not only do you have to declare all gifts while filing your income tax return (ITR), you may also have to shell out income tax on gifts according to your tax slab. It is important to understand which gifts are taxed and which are not. Besides, there are separate income tax rules governing Diwali gifts or bonus received from your employer, says tax expert Homi Mistry, partner, Deloitte India.

Diwali gift or Diwali bonus from employer:

If you receive any gift voucher or token worth more than Rs 5,000 from your employer on any ceremonial occasion like Diwali or New Year, then it is treated as part of your salary and taxed according to your tax slab.

The tax exemption is limited to gift vouchers or tokens totalling less than Rs 5,000 in any given financial year. Therefore, if you receive two vouchers totalling more than Rs 5,000 during a financial year then you will be taxed.

There is no tax exemption on cash given as a gift by an employer. Mistry points out that even if you get Rs 2,000 cash from your employer, it is taxable as income from salary.

Diwali gift from friends:

The tax-free limit in this case is Rs 50,000 per year. If the total value of gifts received during a financial year is more than Rs 50,000, then it is counted as income from other sources and taxed according to your tax slab.

Tax expert Mousami Nagarsenkar says the Rs 50,000 exemption is aggregate. For example, if you receive three gifts worth 20,000 each, then you are breaching that Rs 50,000 exemption limit and will be taxed on the whole Rs 60,000, rather than the difference of Rs 10,000.

Gifts from relatives:

Gifts received from relatives are fully exempt but any income derived from that gift is taxable in the hands of the donor. For this purpose, relatives have been defined as spouse, siblings of self/spouse, parents/grandparents of self/spouse, etc.

For example, if you make a gift of Rs 1 lakh to your wife on Diwali or at any other time during the year, then there is no tax liability for her. But any income she derives from that gift, like interest or profit on investment, will be taxable in your income tax returns.

However, if you are receiving a gift from anyone on the occasion of your marriage or as part of a will, then it is tax exempt.