Tax query: Is your pocket money given by your parents or older siblings taxable?

Tax query: I am 28 years old and still unemployed. My mom gives me Rs 30,000 as pocket money every month. Will I have to pay taxes? I am going to file my ITR nevertheless but not sure if I have to pay any taxes on the money that is credited into my account. My mother is a working professional.

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Reply by Sujit Sudhakar Bangar, Founder, TaxBuddy.com 

In India, certain gifts are subject to taxation under specific circumstances. Understanding these rules is crucial to avoid unforeseen tax obligations. Familiarising yourself with when a gift is exempt from tax and when it is not can help prevent any surprises in the future. Generally, gifts exceeding Rs 50,000 are taxable, unless they are received from close family members like parents, siblings, or spouses. Section 56 of the Income Tax Act outlines which movable properties, including shares, bullion, jewelry, artworks, and virtual digital assets, are exempt from taxation in the case of weddings but taxable if received from non-relatives on other occasions.

Although you may not have to pay taxes on the gift's value at the time of receipt, you will be liable for capital gains tax if you decide to sell the gift later and earn a profit. This tax applies to any gains made from selling financial instruments or gold, depending on the type and duration of ownership.

When your mother or parents give you pocket money, it is the same as receiving a gift from your mother. Gifts from your mother, father, or sibling are tax-free, so you do not need to worry about taxation. In short, you do not need to pay income tax on gifts received from your mother.

In another scenario, if your mother gives you money for trading activities and you earn income from those activities, the earned income can be combined with your mother's income and taxed accordingly.

As per the guidelines outlined in the Income Tax Act, close relatives are defined as follows:

Your spouse
Your siblings
Your spouse’s siblings
Your parents or your spouse’s parents
Any direct ancestor or descendant, such as grandparents or children
The spouses of the aforementioned relatives

Gifts received from these close relatives are exempt from taxation, regardless of the value. For example, if you receive a gift worth Rs 1 lakh from a friend, only Rs 50,000 will be considered as taxable income and will be subjected to the applicable tax rate based on your income bracket.

Types of taxable income

Taxable income encompasses all earnings acquired throughout the tax year, including but not limited to monthly wages, stock dividends, investment income, pensions, capital gains, rental and business income, and other sources of revenue. The income tax owed by an individual is determined by totaling all income earned from various sources.

Different types of taxable incomes are:

Salary
Bonus
Wages
Annuity
Alimony
Dividends
Discounts
Employee awards
Investment Interest
Fee
Hobby income