Durga Puja, Diwali: How can one plan their taxes on gifts, donation, purchases during the festive season?

The upcoming festive season in 2024 is approaching rapidly, commencing with Navratri and Durga Puja, followed by Diwali, Bhai Dooj, Gurupurab, and culminating with Christmas. This period typically involves the exchange of gifts among friends, family members, employers, and other acquaintances. However, it is crucial to inquire whether these gifts are exempt from taxation according to current regulations.

The Income Tax Act stipulates the taxation of gifts in India, and it is vital to discern which gifts are taxable and which ones are exempt to ensure compliance with the law.

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1. Tax on gifts

When gifts are exchanged for a small amount as a token of appreciation, they typically do not fall under the scrutiny of tax authorities. However, in the case of expensive items, it is important to be aware that there may be tax implications and potential obligations to pay taxes on such gifts. The concept of taxing gifts was reintroduced in 2004 after being abolished in 1998. 

Gifts valued over Rs 50,000 from non-relatives must be reported as income and are subjected to taxation based on your applicable income tax slab rate, varying from 5% to 30%, in accordance with your total income. It's important to note that the classification of "close relatives" holds significant importance, as gifts received from these individuals are exempt from tax.

As per the Income Tax Act, close family members encompass: your spouse, siblings, siblings of your spouse, parents or parents of your spouse, any direct ancestor or descendant (e.g. grandparents or children), and the spouses of the mentioned relatives.

"If you receive gifts during the festive season, keep in mind that gifts exceeding Rs 50,000 in value from non-relatives are taxable as "Income from Other Sources" under Section 56(2)(vii). However, gifts received from relatives are exempt from tax and are not subject to this provision," said Mohammed Chokhawala, Tax Expert- ClearTax.

Income tax rules state that gifts of personal items like cars, phones, TVs, furniture, and watches are not subject to taxation, even if their value surpasses Rs 50,000. Such items fall outside the taxable bracket, making them exempt from taxes regardless of their considerable worth.

These exemptions play a significant role in streamlining the tax consequences associated with receiving different kinds of gifts, thereby guaranteeing that numerous everyday exchanges are free from extra tax burdens.

2. Charitable Donations

During the festive season, many people choose to donate to various organizations or institutions. Did you know that you can claim deductions for donations made to specified institutions under Section 80G of the Income Tax Act? This allows you to reduce your taxable income based on the amount donated. Some examples of specified institutions where you can make tax-deductible donations include:

> Prime Minister's National Relief Fund
> National Defence Fund
> Educational institutions like IITs or specified universities
> Government-approved charitable trusts and NGOs
> By donating to these institutions, you can claim deductions of either 50% or 100% of the donation amount, depending on the organization, and enjoy the dual benefit of giving back while reducing your tax liability.

3. Taxation on real estate purchases in festive season

"When buying new houses or flats versus shops or commercial spaces during the festive season, the key tax benefit on principal repayment under Section 80C applies only to residential properties. For houses/flats, you can claim a deduction of up to rs 1.5 lakh on the principal repayment of home loans under Section 80C, which is not available for commercial properties like shops or offices," Chokhawala added.  

The capital gains taxation for both residential and commercial property is the same. However, municipal taxes tend to be higher for commercial properties than for residential properties, depending on the location and local government policies.

It is to noted that the Centre implemented revisions to the Long-Term Capital Gains (LTCG) regime pertaining to real estate after the Union Budget 2024. Taxpayers now have the option to select between two tax rates for properties acquired before July 23, 2024. They can opt for a lower tax rate of 12.5% without indexation or a higher rate of 20% with indexation. This change permits individuals or Hindu Undivided Families (HUFs) to calculate their taxes under both schemes and ultimately pay the lower of the two amounts. The amendment to Finance Bill 2024 facilitated the implementation of this new policy.

This has come as substantial relief regarding long-term capital gains pertaining to immovable property transactions. This relief is primarily attributed to the flexibility inherent in the grandfathering provision, specifically applicable to all property transactions that were concluded prior to the presentation of the budget on July 23.

"In the case of transfer of a long-term capital asset, being land or building or both, by an individual or HuF, which is acquired before the 23rd day of July, 2024, the taxpayer can compute his taxes under the new scheme [@12.5% without indexation] and old scheme [@20% with indexation] and pay such tax which is lower of the two."

In the Union Budget of 2024, Finance Minister Nirmala Sitharaman announced several significant tax-related changes. Among these adjustments, a key modification involves the elimination of indexation benefits for real estate dealings. Additionally, there has been a noteworthy reduction in the long-term capital gains (LTCG) tax rate, which has been decreased from 20% to 12.5%.