Indians will celebrate Bhai Dooj on Wednesday, November 11. Gifts received from a brother are exempt from income tax, regardless of value. However, gifts from cousins or friends become taxable if their total value exceeds ₹50,000 in a year. You should report large tax-exempt gifts in your income tax return.
Gifts received from a brother are exempt from income tax, regardless of value. Here's when it becomes taxable.
Following Dhanteras and Diwali, Indians are set to celebrate Bhai Dooj on Wednesday, November 11 this year, a traditional Hindu festival that honours the special bond between brothers and sisters.
This occasion is often celebrated by exchanging presents, with cash, gold, jewellery and other valuable items among the popular choices.
However, such transfers may have tax implications depending on the relationship between the giver and the recipient and the value of the item being gifted.
When is a gift exempt from tax?
Any gifts received by a sister from her blood brother or sibling is exempt from income tax, irrespective of its value. Under Section 56(2)(x) of the Income-tax Act, 1961, gifts such as cash, jewellery and other assets received from specified relatives are tax-free, and brother is included in the definition of a relative.
Even if the brother is a minor and the gift is funded by parents, no tax is applicable, as both the mother and father are also classified as relatives. This is true even if the value of the gift exceeds ₹50,000.
However, tax exemption does not necessarily mean that the gift does not have to be disclosed in your income tax return (ITR). Large financial gifts should be reported under the 'Receipts not in the nature of income' field in the ITR utilities, which is meant for disclosing such tax-exempt receipts.
For example, if your brother gifts you ₹1 lakh in cash or gold worth ₹3 lakh tomorrow, you must report the amount in your tax return for AY 2027-28, which is during the next tax filing season.
Gifts from cousins, non-relatives attract tax
As per income tax rules, gifts received from maternal or paternal cousins are not exempt from tax if their aggregate value exceeds ₹50,000 in a financial year. The same rule applies to gifts received from people who are not related to you, such as friends or neighbours, even if they are given during Bhai Dooj.
This means that any gift with monetary worth up to ₹50,000 remains tax-free. But the moment the value exceeds this limit, the entire gift becomes taxable under "income from other sources".
Tax exemption on cash or other assets only applies to "specified" relatives which includes parents, siblings, spouse, grandparents, direct lineal ascendants or descendants and siblings of parents like an uncle or aunt.
Should you document money transfer?
Yes, even if gifts received on Bhai Dooj are tax-free, maintaining documents to establish where the money came from and why it was transferred to you is important to avoid tax queries, especially if it involves large amounts.
Parents or brothers can issue a gift deed or a signed gift letter specifying the amount gifted, the date of transfer and confirming that the money is being given voluntarily, with no obligation on the recipient to repay it.
To respond to any queries from the income tax department about a large credit to your account, it is advisable to keep supporting documents handy. These may include bank statements, proof of your relationship with the giver and evidence of the source of funds transferred by your parents or brother.