A complete guide on gift tax in India- How are Gifts Taxed

 In India gifts are generally exchanged between the relatives or between the close knitted families. Exchanging gifts shows affection and love to the other person. Often questions about taxability of income tax on gifts are asked by many taxpayers. The Indian legislative mechanism sought to impose gift tax in the hands of the recipient by enacting the Gift Tax Act, 1958. However, this act was repealed in the year october, 1998 and all gifts are to be considered as tax free. Thereafter the Finance Act, 2004 introduced section 56 of the income tax act for re-taxability of gifts in the hands of recipients at normal tax rates. In fact the income tax return mandates the disclosure of taxable gifts received by an individual or HUF under the heading “Income Tax from other sources”.

 This article seeks to apprehend various provisions concerning the taxability of gifts received by an individual or a Hindu Undivided Family (HUF). Such gifts may be either in the form of money or property received by an individual or a HUF without consideration or any property acquired for inadequate consideration. The Income Tax Act, 1961 segregates gifts into the following categories from the taxation perspective:

1. Sum received without consideration or monetary gift.

2. Movable property received without consideration or gift of movable property

3. Movable property received for inadequate consideration or gift of movable property received at a reduced price than its fair market value

4. Immovable property received without consideration or gift of immovable property

5. Immovable property received for inadequate consideration or gift of immovable property received at a reduced price than its stamp duty value.

Gift Tax on Money received

Where the sum is received without any consideration or the sum received during the financial year exceeds Rs. 50,000/- then it is subjected to be taxed. Therefore, it means that the gift received should be less than the value of Rs. 50,000/- in order to get exemption from the income tax department.

Gift Tax on immovable property received

The gifts of immovable property such as land or building received without consideration entail chargeability of income tax if the property’s stamp duty value exceeds Rs. 50,000.

Also, when an immovable property is received for an inadequate consideration whereby the difference between the consideration and the property’s stamp duty value exceeds the higher of Rs. 50,000 or 5% of consideration, then such difference is taxable in the hands of the recipient as gift tax.

Gift tax on movable property received

The principles pertaining to gift tax on immovable property are also applicable for the gift of movable property, barring the condition of 5% of the consideration. Moreover, instead of stamp duty value, the fair market value of the movable property needs to be considered. 

Jewelry, paintings, drawings, shares and securities, archaeological collections, sculptures, bullion and any work of art fall within the meaning of movable property. But some of the typical movable properties like cars and bikes are excluded from the meaning of movable property.

Section 56(2)(x) of the Income-tax Act, 1961

Under Section 56(2)(x) of the Income Tax Act, 1961the provisions relating to gift tax can be summarized as follows:

Nature of Asset/Gift	Taxable Value
Money	The whole amount if the same exceeds Rs. 50,000. Example: Gift received by an individual for Rs. 45,000 is not taxable and gift received by an individual for Rs. 85,000 is fully taxable.
Movable property received without consideration	The total fair market value of the concerned property, if it exceeds Rs. 50,000. Example: Jewellery received by an individual with FMV of Rs. 1,50,000 without consideration is fully taxable.
Movable property received for an inadequate consideration	The difference between the total fair market value of the property and the consideration, if such difference exceeds Rs. 50,000. Example: Jewellery received by an individual with FMV of Rs. 1,50,000 for a consideration of Rs. 90,000 is taxable at Rs. 60,000.
Immovable property received without consideration	The stamp value of the property, if it exceeds Rs. 50,000. Example: Building received by an individual with a stamp duty value of Rs. 6,00,000 without consideration is fully taxable.
Immovable property received for an inadequate consideration	The difference between the stamp duty value and the consideration, if such difference is more than the higher of Rs. 50,000 and 5% of consideration. Example: Building received by an individual with a stamp duty value of Rs. 6,00,000 for a consideration of Rs. 2,00,000 is taxable at Rs. 4,00,000 (Since the difference exceeds higher of Rs. 50,000 and Rs. 10,000).

Exemptions from gift tax

As laid down under Section 56(2)(x), income tax (or gift tax) is not required to be levied in the hands of the recipient where the money or property is received under the following stipulated conditions irrespective of the value of the gift:

1. “from a relative 

2. on the occasion of the marriage of the individual

3. under a will or by way of inheritance

4. in contemplation of death of payer or donor

5. from any local authority

6. from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in Section 10(23C)

7. from or by any religious trust or charitable institution registered under section 12A or section 12AA

8. by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in Section 10(23C)(iv)/(v)/(vi)/(via)

9. from an individual by a trust created or established solely for the benefit of relative of the individual

10. any distribution of capital assets on the total or partial partition of a HUF to a member of HUF”.

The term “relative” comprises spouse, brother and sister of self and spouse, brother or sister of parents or parents in law, any lineal ascendant or descendant of self or spouse, and spouse of any of the relatives mentioned here. Income tax on gifts received from parents is exempt. But, gifts received from the son of an individual’s uncle/aunt are taxable since it falls outside the ambit of “relative”.

Taxability of gifts from employer to employee

The Government has also penned rules with a view to levy gift tax where gifts are provided by an employer to employees. Those gifts are made taxable as “perquisites” under salary income in the hands of the employees where the aggregate value in a financial year is Rs. 5,000 or more.

Gifts by a resident person to a non-resident person

Despite that provisions relating to Gift ax apply in case of every person, however, gifts by a resident person to a non-resident person are known to be claimed as non-taxable in India since the income does not accrue or arise in India. “To ensure that such gifts made by residents to a non-resident person are subjected to tax in India, the Finance (No. 2) Act, 2019 has inserted a new clause (viii) under Section 9 of the Income-tax Act to provide that any income arising outside India, being money paid without consideration on or after 05-07-2019, by a person resident in India to a non-resident or a foreign company shall be deemed to accrue or arise in India.”

Conclusion

Since gifts are exchanged on numerous occasions in India, they normally fall under the scrutiny of the tax department; and it is imperative to understand the taxability of gifts under the income tax laws with a view to deterring any instances of tax planning/tax evasion on the part of taxpayers. Also, it may be advisable that proper documentation should be maintained to appraise the genuineness of the gift received and sufficient funds with the donor to justify the gift tax provisions.