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Diwali has an Income-tax connection too

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Diwali symbolizes the victory of light over darkness, good over evil and knowledge over ignorance. This is a festival of lights, gifts, feasts and sweets. Like every sphere of life, the festival of lights has some connection with the Income-tax Act. Here are some of the rituals that people follow during Diwali and how these rituals may impact you under the Income-tax Act.

1. Prayer for happiness and safety

We worship our deity on this festival for the success, prosperity, happiness and well-being of our family and friends. We should be honest not only in our prayers but also in discharging our tax liability. Generally, a taxpayer feels that taxes are a burden. It is human tendency to avoid payment of taxes or at least minimising the tax liability. We should appreciate the fact that the Government has to discharge its responsibility towards poor and needy people, which can be done with tax revenue. Hence, taxes are a way to spread happiness among the needy. Thus, we should celebrate our festivals by bringing happiness in the life of others.

2. Ritual of Laxmi Pooja

The Diwali festival is not complete without Laxmi Pooja as it is one of the most important rituals performed during this festival. This ritual is performed to invite Goddess Lakshmi to our home. On this auspicious day, Goddess Laxmi and Lord Kuber are worshipped.

It is a coincidence that around this festival time, Income-tax returns filed by an individual taxpayer is processed by CPC, and taxpayers receive tax refunds from the Income-tax department. The situation of tax refund arises as a taxpayer pays the tax during the year while his actual tax liability is computed at year-end. The amount of ‘Income-tax refund’ can be claimed only by filing an Income-tax return. Such refund is issued after processing of income-tax return. These days’ refunds are directly credited into the bank account of the assessee.

3. Ritual of exchanging gifts in Diwali

Exchanging gifts between friends and relatives on this occasion is quite common. Many people believe that the gifts received out of love and affection are exempt from tax and out of such ignorance they do not offer to pay tax on such gifts.

Gifts are taxable under the Income-tax Act unless they are specifically exempted. The Income-tax Act provides that all gifts above a limit are chargeable to tax in hands of the gift receiver, however, gifts received from relatives or gifts received on some special occasions are not chargeable to tax.

Let’s understand the taxability of gifts. Also, refer to the blog Taxability of gifts

a)Gifts received from an employer

Diwali is the best occasion to give gifts to employees. An employee is liable to be assessed for gifts provided by the employer. The value of any gift or voucher or token in lieu of which such gift may be received by the employee or member of his household on ceremonial occasions or otherwise is taxable provided the value of gift received during the previous year is Rs. 5,000 or more. Gifts below Rs. 5,000 in aggregate during the previous year are exempt.

They are taxable as Perquisites under the head Income from Salary.

Bonus paid or payable by the employer is taxable in the year of receipt if it has not been taxed earlier on due basis. If bonus is received in arrears, the assessee can claim relief under Section 89.

b) Gifts received from friends & relatives

Gifts received from specified relatives is exempt from tax. If money is received from non-relatives, it is chargeable to tax if it exceeds Rs. 50,000 in aggregate in a financial year.

The gift may also be received in some form other than cash such as movable assets. These gifts are taxable in the hands of the recipient if such gifts are received without consideration or for inadequate consideration i.e. market value of such assets less consideration paid is more than Rs. 50,000. Only following movable assets received without consideration or for inadequate consideration are considered as a taxable gift under income tax law:

  1. Shares and Securities
  2. Jewellery and Bullion
  3. Archaeological collections
  4. Paintings, drawings, sculptures, any work of art

Example, if an individual receives money gifts of Rs. 60,000 and receives gifts of shares whose market value is Rs. 35,000. The gifts to be charged to tax shall be Rs. 60,000 only (money gift) and gift of movable assets of Rs. 35,000 shall not be taxable as it does not exceed the limit of Rs. 50,000.

Example, if an individual receives a gift of motor car valuing Rs. 5,00,000, it shall not be taxable under the Income-tax Act as the same is not covered under the definition of movable property.

c) Disclosure of Gifts in ITR

Gifts have to be disclosed as taxable income in the ITR Form in Schedule Salary or Schedule OS (Other Sources), depending upon the nature of the gift. They should be duly disclosed and offered to tax. The non-disclosure of such income may attract penalty for under-reporting and misreporting of income. This penalty ranges from 50% to 200% of the tax payable on under-reported income.

We wish that this Diwali you spread happiness by becoming an honest taxpayer, receive your tax refunds without any hassle, remain safe from the notices of the tax department and receive many tax-free gifts. Wishing you all a very Happy, Safe, Joyful & Prosperous Diwali.

Save tax on profits earned from the sale of investment by using section 54F

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