Please I heard that we should say 'Yahdikum Allaahu wa Yuslih Baalakum' for whoever sneezes among the people of the book, I also learnt that the person who sneezes says this same Du'aa for the one who says 'Yarhamuka Allaahu' to him, please which is more correct or are both valid?

All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad is His slave and Messenger.

If a non-Muslim sneezes, it is permissible for a Muslim to tell him: "May Allaah guide you and rectify your affairs." The evidence about this is that Imaam At-Tirmithi reported that the Jews used to sneeze in front of the Prophet expecting him to tell them: "May Allaah have mercy upon you", but the Prophet used to tell them: "May Allaah guide you and rectify your affairs."

However, if you are the one who sneezes and says 'Al-Hamdu Lillaah' and then a non-Muslim tells you: "May Allaah have mercy upon you", then we do not see any harm to respond to him saying: "May Allaah guide you and rectify your affairs." In reality, you are supplicating to Allaah to guide him, and it is permissible to supplicate to Allaah to guide non-Muslims.

It is confirmed that the Prophet supplicated for the tribe of Daws saying: "O Allaah! Guide the tribe of Daws." He also supplicated for the tribe of Thaqeef as he said: "O Allaah! Guide the tribe of Thaqeef." [Al-Bukhari and Muslim], and these two tribes were not Muslims at that time.

Allaah Knows best.