Gifts, whether in cash or kind, are common in Indian culture. However, under the Income Tax Act, not all gifts are tax-free. The law clearly defines what constitutes a gift, how it is taxed, and who is liable to pay tax on gifts. This article provides an easy-to-understand and practical guide on the taxation of gifts for individuals, professionals, and businesses.
What is Considered a Gift Under the Income Tax Act?
Under Section 56(2)(x) of the Income Tax Act, a ‘gift’ includes:
1. Cash Gifts – Any sum of money received without consideration.
2. Movable Property – Shares, securities, jewellery, paintings, and other specified movable assets.
3. Immovable Property – Land or buildings received without or for inadequate consideration.
If the value of the gift exceeds a certain threshold, it becomes taxable in the hands of the recipient.
Taxability Criteria of Gifts
The taxation of gifts depends on:
Value of the gift
Nature of the gift (cash, movable, immovable)
Relationship with the donor
Occasion or reason for the gift
1. Gifts Received from Relatives
Gifts from specified relatives are fully exempt from tax, regardless of the value.
Relatives include:
Spouse
Brother or sister of the individual or of the spouse
Brother or sister of either of the parents
Any lineal ascendant or descendant (parents, grandparents, children, grandchildren)
Spouse of the above relatives
2. Gifts Received on Certain Occasions
Gifts received on the following occasions are also tax-free:
At the time of marriage
Under a will or inheritance
In contemplation of death of the payer
From a local authority, fund, or registered charitable trust
3. Gifts from Non-Relatives
Cash Gift: If the total cash gift from non-relatives exceeds ₹50,000 in a financial year, the entire amount is taxable.
Movable Property Without Consideration: If fair market value (FMV) exceeds ₹50,000, the entire FMV is taxable.
Movable Property for Inadequate Consideration: If the difference between FMV and consideration exceeds ₹50,000, the difference is taxable.
Immovable Property Without Consideration: If stamp duty value (SDV) exceeds ₹50,000, the SDV is taxable.
Immovable Property for Inadequate Consideration: If SDV exceeds consideration by more than the higher of ₹50,000 or 10% of consideration, the difference is taxable.
Real-Life Examples
Example 1: Gift from a Friend
Rahul receives ₹70,000 in cash from a friend on his birthday. Since this exceeds ₹50,000 and is from a non-relative, the entire ₹70,000 is taxable.
Example 2: Property from Uncle
Priya receives a flat from her maternal uncle as a gift. Since an uncle is considered a relative under the Act, the gift is tax-exempt.
Example 3: Shares from Employer
Ravi receives shares worth ₹1 lakh from his employer. Since this is a gift from an employer, it is considered a perquisite and taxable under salary income, not gift income.
Gift Tax Compliance and Reporting
1. Disclosure in ITR: All taxable gifts must be disclosed under ‘Income from Other Sources’ in the income tax return.
2. Documentation: Maintain proper documentation such as gift deeds, bank statements, and valuation certificates.
3. Gifting Property: Consider executing a gift deed and registering the same to avoid future disputes.
Exemptions for Gifts to and from HUF (Hindu Undivided Family)
Gifts received by an individual from a HUF or by a HUF from its members are tax-exempt, as they are considered gifts from relatives.
Example:
A member of a HUF gives ₹2 lakhs to the HUF for purchasing a property. This amount is exempt as it comes from a relative (the member).
Case Study: Misreporting of Gift Income
Background: A salaried individual, Anjali, received jewellery worth ₹2,00,000 from a family friend for her housewarming ceremony.
Challenge: Anjali assumed it was tax-free and didn’t report it in her ITR. A tax notice was later issued as the jewellery value exceeded ₹50,000 and the donor was a non-relative.
Solution:
She revised her return, declared the amount under ‘Income from Other Sources’, and paid applicable tax along with interest.
Anjali also maintained documentation proving the source and nature of the gift.
Outcome: She avoided penalties by rectifying the mistake and gained better clarity on tax rules regarding gifts.
How to Prepare for Gift Tax Compliance?
1. Know the Relationship Rule: Always check if the donor qualifies as a relative.
2. Track Gift Values: Maintain a yearly record of all gifts received, especially from non-relatives.
3. Document Gifts Properly: Use gift deeds, valuation reports, or bank records to establish legality.
4. Consult a Tax Expert: Seek advice if the gift is of high value or involves immovable property.
5. File Correct ITR: Ensure correct reporting of gifts under ‘Income from Other Sources’ when filing returns.
Conclusion
While gifts are often given out of love or goodwill, ignoring tax implications can lead to non-compliance and penalties. The Income Tax Act clearly distinguishes between taxable and exempt gifts based on their value, type, and source. By understanding the rules and maintaining proper documentation, taxpayers can ensure compliance and avoid legal troubles. Gift wisely, and file honestly!
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