A note on Gift Tax in India

The Gifts were taxed under The Gift Tax Act, 1958 and the same was repealed in 1998. As on date – there is no Gift Tax Act in India. However, Taxing Gifts have come in different avatar under the Income Tax Act. Basic terms to know –

  • The person who is giving a gift is called the Donor,
  • The person receiving the gift is known as Donee,
  • Gift is taxable in the hands of recipient.

Let me run through a few questions to make things simple –

# 1 Mr. Aravind wants to gift Rs.75,000 to Mr. Sampath, a colleague in his Office. Is Sampath liable to pay tax on Rs.75,000?

Yes. As per Section 56(2) (x)(a) of Income Tax Act, Mr. Sampath has to pay taxes on Rs.75,000 under Income from Other Sources.

Section 56 (2) (x)(a) reads as under –

 

where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017, —

(a)  any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum

# 2 Mr. Sampath gifts Rs.75,000 to his father. Should his father pay tax on Rs.75,000?

No.  Under Section 56, there are exceptions to the above rule. As per this, if any money or any property is received from any relative, then such amount is not taxable.

Section 56(2)(x) reads as under –

 

Provided that this clause shall not apply to any sum of money or any property received—

(I)  from any relative

 

# 3 Who all are called as Relatives?

For the purposes of this clause, “relative” means—

  (i)  spouse of the individual;

 (ii)  brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

 (v)  any lineal ascendant or descendant of the individual;

(vi)  any lineal ascendant or descendant of the spouse of the individual;

(vii) spouse of the person referred to in clauses (ii) to (vi)

The below chart gives exhaustive list

Spouse of the individualHusband or Wife
Brother or sister of the individualHusband’s Brother and his wife

Husbands’ sister and her husband

Wife’s brother and his wife

Wife’s sister and her husband

Any lineal ascendant or descendant of the individualFather

Mother

Son and his wife

Daughter and her husband

Grand father

Grand Mother

Any lineal ascendant or descendant of the spouse of the individualFather in Law

Mother in Law

Grandfather in Law

Grandmother in Law

Brother or sister of either of the parents of the individualFather’s brother and his wife

Fathers sister and her husband

Mother’s brother and his wife

Mother’s sister and her husband

Any Gift received from the above relatives are exempt from Income Tax. You mean even if I take Rs.5,00,000 through WILL it is exempt?

Yes, any amount can be gifted, there is no upper limit. The exemption includes any sum of money or any property received under a will or by way of inheritance also.

# 4 Suppose, Ms. Vrushali receives Gifts worth more than 50,000 during her marriage. Is it taxable?

It is EXEMPT. Any money or property received from any person on the occasion of the marriage of the individual is not taxable.  Apart from marriage there is no other occasion in which gift received by an individual is not charged to tax. Hence, gifts received on occasions like birthday, anniversary, etc., exceeding Rs.50,000 per year will be charged to tax. ​​

# 5 Mother receives Rs.1,00,000 from her son who is living in USA during the year. Hope this is covered in exempted gifts?

Yes. It is. The gifts from relatives is exempt, irrespective of their place of stay, India or abroad.

# 6 Suppose, Mr. Karthik gets Rs.20,000 from a friend, Rs.30,000 from a colleague, Rs. 25,000 from Father’s Brother’s son, are they still taxable?

Yes, it is taxable. All the above payments are not from “Relatives” and if the “Aggregate value of such sum received during the year” is more than Rs.50,000 it is taxable.

# 7 One question on immovable property. Mr. Sajid gets a residential plot free of cost from one of his friends, for all the help done by him. The market value of the property is Rs.34 Lakhs. The guidance value of the property as per Sub-Registrar’s office is Rs.29 Lakhs. Should Sajid pay tax and if so, on which amount?

Yes. Sajid has to pay tax on Gift valued as per Guidance Value of Rs.29 Lakhs.

# 8 Mr. Sahadeva transfers (Gifts) Rs.10,00,000 to his wife, Ms. Vijaya’s account during Financial Year 2019-20.  She earned Rs.72,500 as interest. Is this not a good idea to transfer the money from husband to wife to save Tax on Interest income?

No. Though there is no tax on Gifting of money from husband to wife, there is a catch. Section 64(1)(iv), any income arises from assets transferred directly or indirectly to the spouse to be included while computing the income of the spouse. In the above case, Rs.72,500 to be included in Sahadeva’s Income Tax Return.

# 9 Mr. Bheema transfers (Gifts) Rs.10,00,000 to his son. He also earns Rs.72,500. Is it taxable in the hands of Bheema?

  • If the son is a minor (not attained the age of 18 years), it has to be clubbed with the income of Bheema (as per Section 64(1A) of Income Tax Act)
  • If the son is a major, it will not be taxed in the hands of Bheema.

# 10 Mr. Radhakrishna transfers Rs.15,00,000 to his daughter-in-law’s account. The interest income from such money is taxable in the hands of Radhakrishna. As per Section 64(1)(vi) – income from any amount transferred to son’s wife will be charged to tax in the hands of transferor. [Note: Is it practically possible for the Tax department to check such transactions? Answer is ‘mostly NO’. If they track, one has to pay the taxes]

 # 11 Is it permitted to Gift money to close relative who is staying abroad?

The above gifting rules are appliable for all gifts made by a resident Individual, whether the recipient is Resident or Non-Resident, located in India or abroad.

However, when the gifting of money is done to an NRI, the donor has to follow Reserve Bank of India (RBI) regulations on repatriations. Liberalized Remittance Scheme (LRS) norms have to be followed while sending the money.

# 12 Should one declare the Gifts received from relatives in Income Tax Return?

Yes. All exempt income received during the year should be declared under Schedule EI “Details of Exempt Income (Income not to be included in Total Income or not chargeable to tax)” in ITR Form.

# 13 Mr.Arjuna, aged 69 years, makes a WILL in favor of his son, Mr.Iravan, that upon his death, the property in J P Nagar (which was purchased in 1988) will be bequeathed to him. Mr. Arjuna died in 2018. The Khata of the property is transferred in Iravan’s name in July 2019. Now he wants to sell the property. What are the tax implications in this case?

  • When Iravan acquires the property through WILL OR INHERITANCE, it is considered as Gift and no tax is payable.
  • But when Iravan sells this property, he has to pay Capital Gain Tax
  • As you are aware, if the property is held less than 2 years, it is considered as Short-Term Capital Asset and higher rate at 30% tax to be paid. However, if the property is acquired by WILL, Inheritance, then the period of holding to be considered from the date of acquisition by the previous owner. In the above case, the period of holding is from 1988 and hence it is a Long-Term Capital Asset and taxed at 20%

# 14 Another related question. When Arjuna acquired the property in 1988, he paid Rs.35,000 to BDA. Should Iravan consider this amount and index it as cost of acquisition? Or take the guidance value of the property in 2018, when the property gets transferred in this name?

  • As per Section 55(2)(b) of Income Tax Act, when the property is acquired before 2001, the assessee can opt for the Guidance Value as on 1st April 2001 as the cost of acquisition
  • In the above example, Guidance value in April 2001 was Rs.3,75,000. So, Mr. Iravan has to consider the Indexed cost of acquisition of the property as his cost.
  • Though the property is registered in 2018, the Guidance value of 2018 can’t be considered.

 # 15, Final question before I conclude – Is there a requirement for Gift Deed or any equivalent document?

  • A Gift deed is a document to record giving of gifts and is executed by the person giving the gift (Donor) and the person receiving the gift) Donee. Suggest to make Gift deed for all gifts, be it money or property.
  • Gift deed is mandatory for immovable property and it has to be registered at Sub-Registrar’s office. After the Gift deed is executed, the Donee can get Khata transferred to his name.
  • Gifting of money via Bank Transfer / Cheque/DD is encouraged. Or else, the Tax department may dispute the source of CASH in the hands of donor and also donee. Avoid Cash Gifts.
Please follow and like us:
5 2 votes
Article Rating
Share This :

About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 28+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional, Registered Valuer (F&SA) and Social Auditor.Prasad welcomes your comments and questions. Please email him at simplifiedlaws20@gmail.com

Check Also

Union Budget Part I – Proposals Related to Individual Taxation

You might have already come across plenty of information on the budget proposals. Still, I …

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments
0
Would love your thoughts, please comment.x
()
x