Introduction
Giving and receiving gifts is an integral part of India’s cultural heritage. While in most cases, the value of such presents is nominal, but in some cases, the value of gifts such as property, jewelry, works of art, etc., can be substantial. To provide clear guidelines regarding which presents are taxable and the rate at which gift tax would be applicable, the Gift Tax Act was initially introduced in 1958. However, this act was later repealed in 1998.
After the Gift Tax Act, 1958 was repealed, all presents, irrespective of their value, were tax-free till the reintroduction of new rules for gift taxation in 2004 as part of the Income Tax Act. These provisions for the taxation of presents were further amended in 2010. As a result of multiple changes to tax rules governing presents, many of us are confused regarding the tax implication of the gifts we receive.
However, many a time gifts can also be a part of tax planning/tax evasion. While tax planning done within the framework of law is permissible, tax evasion is prohibited and can be penalised.
In this blog, we will discuss various rules and regulations regarding how gifts are taxed in India.
Gift Taxation in India
What is a Gift as per the Income Tax Act?
Under the definition provided by the Income Tax Act, a “gift” can be in the form of money and movable/immovable property that an individual receives from another individual or organization without making a payment. In legal terms, the person or organization providing the gift is termed the donor while the gift receiver is known as donee.
By this definition, examples of presents that are taxable in India include:
- Money received by cash, draft, cheque, bank transfer, etc.
- Immovable property such as land, building, residential/commercial property
- Movable property such as jewelry, shares, bonds, paintings, sculptures, etc
Under Which head gifts are taxed in India?
As per Section 56 of the Income-tax Act,1961 as it stands today which was amended in 2017, gifts received by any person or persons are taxed in the hands of the recipient under the head ‘Income from other sources’ at normal tax rates.
Taxable value of a gift
| Type of Gift | Gift Tax Applicability | Taxable Value Value of Gift |
| Cheque, cash, or bank transfer | Sum > Rs.50,000 | The entire sum of money received |
| Immovable property, like buildings, land, etc., was received without making any payment. | Stamp duty value* > Rs.50,000 | Stamp duty value of the property |
|
Any immovable property for inadequate consideration |
Stamp duty value* exceeds consideration by > Rs.50,000 |
Stamp duty value Minus consideration Example 1:Stamp duty value Rs.2,00,000 Consideration Rs.75,000. The taxable amount is Rs.1.25 lakh (stamp duty value exceeds consideration by > Rs.50,000) Example 2 In Example 1, if consideration is Rs.1,60,000, the taxable gift is Nil as stamp duty value does not exceed consideration by > Rs.50,000
|
|
Assets like shares, jewelry, sculptures, paintings, etc., without paying any consideration.
|
Fair market value *(FMV) > Rs.50,000 |
FMV of such property |
|
Assets like shares, jewelry, paintings, sculptures, etc., for consideration (that is, purchased by the donor before being gifted) |
In case the fair market value of the gift exceeds the purchase price by Rs. 50,000 or more. |
The difference between the fair market value and the purchase price of the present is taxable. |
Gift Tax Exemption Relatives List
As mentioned above, gifts received from relatives are not taxable under the Income Tax Act. Below is a list of persons who are defined as relatives as per the Income Tax Act –
- Spouse of the individual.
- Individual’s Brother or sister
- Brother or sister of the individual’s spouse.
- Brother or sister of either of the individual’s parents.
- Individual’s Lineal ascendant or descendant.
- Lineal ascendant or descendant of the individual’s spouse.
- Spouse of the persons referred to in (2) to (6).
- Note: Gifts received from the members of a HUF are exempt from Tax.
Gifts received from friends is taxable
What are the Exemptions on Gift Tax?
Cash or gifts received upto Rs.50,000 during a financial year are exempt from tax; however, in case of gifts of a value higher than this threshold, the entire amount is taxable in the hands of the recipient.
Gifts Exceeding Rs.50,000 – For example, if you receive gifts worth Rs.50,000 in a year, the entire amount will be exempt from tax. On the other hand, if you receive gifts worth more than Rs.50,000, let’s say, Rs.75,000, then the entire amount is taxable in the hands of the recipient at the given slab rate.
Property Received for Inadequate Consideration – In case you receive property for a higher price, then the difference between stamp duty and consideration is considered a taxable gift. For example, if you are gifted a flat worth Rs.50 lakh and you pay a consideration of Rs.30 lakhs, then the excess of Rs.20 lakhs will be considered a taxable gift. At the same time, if the difference lies within the threshold of Rs.50,000, then it does not attract income tax.
Gifts from Relatives – Gifts received from relatives as specified in the Income Tax Act. These relatives include mother, father, brother, sister and spouse. Even though the gift is exempt in the hands of the recipient, any income generated from the gift received from a relative might be taxable under the clubbing provisions of the Income Tax Act. For example, if a person receives Rs.5,00,000 as a gift from a relative, this amount will not be charged to the tax. However, if this amount is invested in an FD, then the returns on such FD will be subject to tax.
Gifts at Wedding – gifts received by a newly married couple from their immediate family members on the occasion of their marriage are exempt from tax. Wedding gifts can include cash, jewelry, house property, stock or gold. These gifts received from immediate family members are not subject to tax.
Gifts by way of Inheritance or Will – Gifts received by way of will or inheritance are exempt from tax as per the provisions of the Income Tax Act 1961.
Gift Received from Local Authority or Charitable Trust – Any money received from a local authority, charitable trust, fund, foundation, university, or any other local authority registered under section 12A is exempt from tax. Also, money received by a meritorious student from college/university or a patient under medical care is exempt from tax.
How to save tax with gifts?
There are ways to save taxes through gifts in India. When the gift donor and receiver are unrelated, the maximum amount that can be transferred without tax implications is Rs 50,000. Any amount beyond this limit makes the entire sum taxable based on the receiver’s tax slab.
Tax benefits can be availed by gifting to close family members, including children, parents or parents-in-law. Gifting to family members does not change the donor’s taxable income, however, any interest earned by the recipients from the gifted money is considered income. This income does not increase the donor’s tax burden or require inclusion in tax filings.
Given the scrutiny by the income tax department, individuals involved in significant gift transactions are advised to maintain proper documents. Proper documentation helps establish the genuineness of the receipt and can justify the source of funds when required under the purview of gift tax in India. It is crucial to adhere to tax regulations and maintain transparency to ensure compliance related to gift taxation in India.
Conclusion
In conclusion, the taxation of gifts in India is governed primarily by the Income Tax Act, which seeks to prevent the misuse of gifts as a means to avoid tax liabilities. Gifts above specified limits are subject to taxation under certain circumstances, ensuring that substantial transfers of wealth are appropriately accounted for in the tax system.