Answer By law4u team
In India, the taxation of gifts is primarily governed by Section 56(2) of the Income Tax Act, which specifies tax implications for gifts received by individuals. Domestic servants (such as housekeepers, maids, drivers, etc.) do not fall under the category of relatives, which means the rules governing the gifting of money or assets to them differ from gifts made to family members. Understanding the tax implications of giving gifts to domestic servants is essential for ensuring compliance with tax laws.
Tax Implications for Gifts to Domestic Servants:
Gift Tax under Section 56(2):
Section 56(2) of the Income Tax Act stipulates that any gift exceeding Rs. 50,000 in a financial year, when received by a non-relative (such as a domestic servant), is taxable as income in the hands of the recipient.
This means that if you give a cash gift or valuable items (like jewellery, property, or other assets) to a domestic servant, the total value of the gift must be reported by the servant in their income tax return, and it will be subject to tax as income.
Threshold Limit for Tax-Free Gifts:
If the total value of the gift to a domestic servant does not exceed Rs. 50,000 in a year, the gift is not taxable under Section 56(2).
However, if the gift exceeds Rs. 50,000, the excess amount is treated as income and taxed accordingly based on the recipient's income tax slab.
Type of Gift Affects Taxability:
Cash gifts given to a domestic servant are directly taxable under Section 56(2) if the total amount exceeds Rs. 50,000.
Non-cash gifts like jewellery, furniture, or other personal items are also taxable if the total value of the gift exceeds the Rs. 50,000 threshold.
Gift Deed Not Necessary:
For gifts made to non-relatives, including domestic servants, there is no legal requirement to create a gift deed (unlike gifts made to relatives, which can be formalized through a gift deed for clarity). However, it is recommended to maintain some documentation of the gift transaction, especially if the value exceeds Rs. 50,000.
Income Tax Returns for Domestic Servants:
If the domestic servant receives gifts exceeding Rs. 50,000, they will need to report the gifts in their income tax return under Income from Other Sources.
The servant will pay tax on the value of the gift based on their total annual income, which includes the gift amount. If their total income, including the gift, falls under the taxable limit, they will still need to file a return for compliance purposes.
Income Tax Liability on Gifts:
The domestic servant will be subject to taxation based on the total amount received from gifts along with any other income they may have, such as salary or other income sources.
The gift tax will be levied based on the recipient's income tax slab. For example, if the domestic servant's total income (including the gift) exceeds the basic exemption limit (currently Rs. 2.5 lakh), they will need to pay tax based on the applicable slab rates.
Exemptions:
While gifts to relatives are exempt under Section 56(2), gifts to domestic servants are not exempt unless the gift is below the Rs. 50,000 limit.
However, if the gift is made in kind (such as clothes or a token gift), it may still be taxable if its value exceeds the limit. But small gifts like festive gifts worth Rs. 5,000 or Rs. 10,000 for personal occasions (like Diwali, New Year's, etc.) would generally not attract tax.
Example:
Example 1: Cash Gift to a Domestic Servant
A household owner gives Rs. 60,000 in cash to their domestic servant during the year.
Since the total gift exceeds Rs. 50,000, the domestic servant will need to report the gift as income in their income tax return.
The Rs. 60,000 will be treated as income and taxed based on the domestic servant's income tax slab.
Example 2: Non-Cash Gift (Jewelry)
A household owner gifts a gold chain worth Rs. 80,000 to their domestic servant.
Since the value of the gift exceeds Rs. 50,000, the servant must declare the gold chain in their income tax return.
The Rs. 80,000 will be considered income for tax purposes and taxed accordingly.
Example 3: Small Gift for Festival
The employer gifts Rs. 10,000 in cash to the domestic servant as a festival gift.
Since the value is less than Rs. 50,000, this gift is not taxable under Section 56(2), and the domestic servant does not need to report it as income.
Conclusion:
In India, gifts given to domestic servants are subject to taxation if the value of the gift exceeds Rs. 50,000 in a financial year. While gifts under Rs. 50,000 are tax-free, any amount beyond this threshold is taxable as income for the recipient, and they are required to report it in their income tax return. It is important for both the giver and the recipient to ensure compliance with tax laws and document significant gifts to avoid any misunderstandings with the tax authorities.
