Gift-giving is one of the good manners that maintains and strengthens relations between the giver and the recipient. It is one of the acts that Prophet Muhammad recommended Muslims to do. Al-Bukhari narrated that ‘Aa’ishah said: "The Messenger of Allah used to accept gifts and reward people for giving them."

　　The phrase: “Reward people for giving them,” means giving the giver (at a later time) something of equal value at least in return.

　　This Hadeeth (narration) indicates that accepting gifts and giving something of equal value (or more) to the giver is the way of the Prophet .

　　The Prophet enjoined responding in kind to favours, as he said in an authentic narration: “Whoever does you a favour, respond in kind, and if you cannot find the means of doing so, then keep praying for him until you think that you have responded in kind.” [Abu Dawood]

　　“Whoever does you a favour,” means, whoever treats you kindly in word or deed or by gifting you.

　　“Respond in kind,” means to treat him kindly just as he has treated you kindly.

　　“If you cannot find the means of doing so” means if you do not have the money.

　　“Until you think that you have responded in kind” means, repeatedly supplicate for him until you think that you have rewarded him his due.

　　One of the Du'aa' forms that one can say is 'Jazaka Allahu khayran' (may Allah reward you with good). At-Tirmithi narrated that Usamah Ibn Zayd said: The Messenger of Allah said: “Whoever has a favour done for him and says 'Jazak Allahu khayran' has done his utmost to thank him.” [At-Tirmithi]

　　“Done his utmost to thank him,” means that he has done his utmost to express his gratitude, because he has acknowledged his shortcomings and that he is unable to reward and thank him enough, so he refers the matter to Allah, to reward him in the best manner. It is said that: "If you are unable to give him back in kind, then speak at length thanking him and supplicating for him." [Tuhfat Al-Ahwathi]

　　The Permanent Committee (a supreme Islamic judicial authority in Saudi Arabia, was asked a similar question) and replied as follows:

　　"There is nothing wrong with accepting it (an amount of money as a gift), without you (the recipient) longing for that, and you can respond in kind if you are able to with an appropriate gift, or you can supplicate for him, because the Prophet said: “Whoever does you a favour, respond in kind … (the above-mentioned Hadeeth)." [Fatawa Al-Lajnah Al-Daa’imah]

　　Difference between charity and gift-giving

　　Charity is given to the poor and the needy to meet their needs, and is done with the intention of seeking the Pleasure of Allah. Its intention is not limited to a specific person; rather it is given to any poor or needy one.

　　On the other hand, a gift is not necessarily given to a poor person, rather it may be given to rich or poor; the intention is to show friendship and to honour the recipient.

　　Both of them – charity and gift-giving – are righteous deeds for which a person will be rewarded (and please his Lord), but which is better?

　　Ibn Taymiyah stated that Sadaqah (charity) is that which is given for the sake of Allah as an act of worship, without intending to give it to a specific person and without seeking anything in return, rather it is given for charitable causes, such as to the needy. A gift is given with the intention of honouring a specific person, either because the recipient is your friend whom you love, or because you want something in return.

　　Hence, the Prophet used to accept gifts and reward people for them, so that no one could remind him of their favours, but he did not accept the “refuse” of people that they gave to purify themselves of sins, namely charity. He did not accept charity for this and other reasons.

　　Once this is understood, then charity is better, but there is a sense in which a gift is better than charity, such as giving a gift to the Messenger of Allah during his lifetime out of love for him. Also, gifts which a person gives to a relative in order to uphold the ties of kinship or to a brother in Islam may be better than charity.

　　Based on this, giving to one of your relatives may be better than giving charity, because it is more befitting to uphold the ties of kinship. The same may apply if you give a gift to a friend of yours, because that will strengthen the bonds of love between you. The Prophet said: “Exchange gifts, as that will lead to increasing your love to one another.” [Al-Bukhari]

　　What the Hadeeth means is that giving gifts may generate and increase love.

　　To sum up, gifting vs. giving charity is dependent on the situation but, in principle, spending in charity takes precedence.