Does your gift of gold coin, jewellery on Diwali comes wrapped with tax liabilities?

Gold gifts fall under Section 56(2)(x) of the Income Tax Act, which taxes receipts without consideration if they exceed certain thresholds.

Diwali often involves exchange of gifts such as gold jewellery, coins or bars, which can have tax implications. While there's no specific exemption for Diwali, general rules apply to gold received as gifts. Understanding these can help avoid unexpected tax liabilities.

Exemption limits for gold gifts

Gold gifts fall under Section 56(2)(x) of the Income Tax Act, which taxes receipts without consideration if they exceed certain thresholds. For non-relatives, the aggregate fair market value of all specified movable property gifts in a financial year is exempt up to Rs 50,000.

"There is no special Diwali exemption for gold gifts. The general gift rule applies i.e. gold received from non-relatives is tax-free only if the aggregate fair market value of all specified movable property gifts in the year does not exceed Rs 50,000," Alay Razvi, managing partner at Accord Juris,  said.

Ritika Nayyar, Partner at Singhania & Co, said, if the fair market value of gold exceeds Rs 50,000, then the whole amount of consideration is taxable in the hands of the recipient as "income from other sources".  The rate depends on the recipient's income slab.

Relatives and unlimited exemptions

Tushar Kumar, an advocate at the Supreme Court , said, "Gifts received from specified 'relatives', including parents, spouse, siblings, lineal ascendants and descendants, are wholly exempt irrespective of value." This covers most family exchanges during Diwali.

Non-relatives encompass friends, cousins, or business associates not fitting the definition. Cumulative tracking across the year is crucial to stay under the limit.

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Valuing gold for tax purposes

Gold's value is based on its fair market value (FMV) on the receipt date. This applies uniformly to coins, bars, or jewellery, all classified as movable property.

"Value gold at its fair market value on the date of receipt; for jewellery, the income-tax rules deem FMV as the price it would fetch in the open market on the valuation date," Razvi said. If an invoice from a registered dealer exists, it can serve as proof; otherwise, a valuer's report is recommended for items over Rs 50,000.

Forms of gold and special scenarios

Whether gold comes as coins, bars, or ornaments, tax treatment remains identical.

Employer gifts differ, treated as perquisites under "income from salaries." “Non-monetary festive items like gold vouchers are exempt up to Rs 5,000 annually. Gifts of any nature above Rs 5,000 is treated as a taxable perquisite and the employer is obligated to include the same in the employee’s Form 16 and deduct tax at source accordingly,” said Pallav Pradyumn Narang, Partner at CNK.

Documentation to avoid scrutiny

Records prove the gift's legitimacy and prevent tax evasion claims. Razvi recommends "a simple gift deed/letter identifying donor, donee, relationship, date, occasion, description/weight/purity of gold, and a clear statement that it is a gift without consideration." Include PAN details, relationship proof, and valuation copies.

Maintain these for potential audits, especially if values near thresholds.

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Risks of non-reporting

Failing to report taxable gifts invites penalties. "Non-reporting can trigger tax demand with interest and penalty for under-reporting (typically 50% of tax) or misreporting (200% of tax)," Razvi said.

Nayyar said, "It can be added to your total income as unexplained cash credits or unexplained investments and source of such income can be questioned. This addition is usually taxed at a much higher rate of tax plus interest and penalties shall apply."