Taxation on Gifts under Income Tax Act, 1961- An In-depth Summary

Giving and Receiving gifts are an integral part of India’s cultural heritage and are often treated as a token of love, gratitude and appreciation. The Income Tax of India imposes taxes on certain gifts received by individuals while some gifts are free from taxation. It is essential to understand the Rules and Regulations framed by the government to avoid any legal and financial complications. In this article, we will discuss various rule and regulations regarding how gifts are taxed in India.

Gifts as per the Income Tax Act can be classified as follows:

• Monetary Gift (Cash): Any sum of money received without consideration.
• Gift of Movable Property without consideration: Specified movable properties received without consideration.
• Gift of Movable Property for inadequate consideration: Specified movable properties received at a reduced price (i.e. for inadequate consideration), it can be termed as ‘movable property received for less than its fair market value’.
• Gift of Immovable Property without consideration: Immovable properties received without consideration.
• Gift of Immovable Property for inadequate consideration: Immovable properties acquired at a reduced price (i.e. for inadequate consideration), it can be termed as ‘immovable property received for less than its stamp duty value’.

Note:

• Immovable property means Land or building or both (it does not include agricultural land in rural areas)
• Movable property means Shares, securities, jewellery, archaeological collection, drawing, painting, any work of art, bullion, vehicles, being capital asset of the taxpayer and includes Virtual Digital Asset (VDA).

Tax Treatment of Gifts

1. Tax Treatment of monetary gifts:

Any sum of money received without consideration (i.e., monetary gift received in the form of cash, cheque, draft, etc.) by an individual/ HUF, the aggregate value of such sum during the year exceeds Rs. 50,000 will be charged to tax.

2. Tax Treatment of Movable property received

• Without consideration: Where any person receives, in any previous year, from any person any property other than immovable property without consideration, the aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property will be taxable in the hands of receiver. For example: During the year, Mr. X received Jewellery from his friend, the fair market value of the jewellery is Rs. 84,000. In such a situation, since his friend does not cover under the definition of relative and the fair market value exceeds Rs. 50,000; hence, Rs. 84,000 will be taxable in the hands of Mr. X.
• For Inadequate Consideration: Where any person receives, in any previous year, from any person any property other than immovable property for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, the aggregate fair market value of such property as exceeds such consideration. The excess differential amount will be taxable in the hands of receiver. For example: During the year, Mr. X purchased gold jewellery for Rs. 1,84,000, the fair market value of gold jewellery is Rs. 2,84,000. It can be observed that the jewellery is acquired for less than its market value. Therefore, the excess of fair market value over the purchase price amounting to Rs. 1,00,000 is more than Rs. 50,000. Hence, the entire excess of fair market value over purchase price i.e. Rs. 1,00,000 will be charged to tax in the hands of Mr. X.

3. Tax Treatment of Immovable Property Received

• Without Consideration: Where any person receives, in any previous year, from any person or persons any immovable property without consideration and the stamp duty value of which exceeds fifty thousand rupees then in such case, the stamp duty value of such property will be taxable in the hands of receiver. For example: If an individual received a gift of flat from his friend. The stamp duty value of the flat is Rs. 84,000. In this case, since the stamp duty value of property received exceeds Rs. 50,000, then the entire stamp duty value of the property is chargeable to tax.
• For Inadequate Consideration: Where any person receives, in any previous year, from any person immovable property for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts: the amount of fifty thousand rupees; and the amount equal to 10% of the consideration The excess differential amount will be taxable in the hands of receiver. For example:If the stamp duty value of the asset is Rs 10,00,000 and the consideration is Rs 7,50,000. Then the difference of Rs 2,50,000 (which is higher than Rs 50,000 and 10% of the consideration, i.e., Rs 75,000) will be taxable as income from other sources in the hands of the recipient.

However, in the following cases if any gifts are received in following situations or from below mentioned people, then those gifts are fully exempt from tax.

1. Money received from relatives*.

2. Money received on the occasion of the marriage of the individual.

3. Money received under will/ by way of inheritance.

4. Money received in contemplation of death of the payer or donor.

5. Money received from a local authority [as defined in Explanation to section 10(20) of the Income-tax Act].

6. Money received from any fund, foundation, university, other educational institution, hospital or other medical institution, any trust or institution referred to in section 10(23C). [w.e.f. AY 2023-24, this exemption is not available if a sum of money is received by a specified person referred to in section 13(3)]

7. Money received from or by a trust or institution registered under section 12A, 12AA or section 12AB [w.e.f. AY 2023-24, this exemption is not available if a sum of money is received by a specified person referred to in section 13(3)].

8. Money received as a consequences of demerger or amalgamation of a company or business reorganization of a co-operative bank under section 47.

9. Share received as a consequences of business reorganization of a co-operative bank under section 47(vicb)

10. From any person, in respect of any expenditure actually incurred by individual on his medical treatment or treatment of any member of his family, for any illness related to COVID-19 (subject to such conditions as prescribed by Govt.).

11. By a member of the family* of a deceased person, if cause of death is illness related to COVID-19,:

• • From the employer of the deceased person; or
  • From any other person or persons to the extent that such sum doesn’t exceed Rs. 10 lakh.

  Note: The member must receive the payment within 12 months from the date of death of such person and satisfy such other conditions which may the Central Government may notify in this behalf

  Specified Notes:

  ‘Relative’ for this purpose means:

  1. In case of an Individual

  • Spouse of the individual
  • Brother or sister of the individual
  • Brother or sister of the spouse of the individual
  • Brother or sister of either of the parents of the individual
  • Any lineal ascendant or descendent of the individual
  • Any lineal ascendant or descendent of the spouse of the individual
  • Spouse of the persons referred to in (b) to (f).

  2. In case of HUF, any member thereof.

  3. ‘Family’, in relation to an individual, means:

  • The spouse and children of the individual; and
  • The parents, brothers, and sisters of the individual or any of them, wholly or mainly dependent on the individual.

  Conclusion

  Having a clear understanding of how the gift taxation in India works can help you make accurate income tax declarations. It can also help you plan to minimize your tax burden before filing Income Tax Returns. It is also essential for individuals to evaluate their transactions to check if they fall under any of the taxable scenarios covered above and to maintain sufficient documentation such as gift deeds etc of the gifts given/received. In the long term, this will not only help you avoid receiving a notice from the Income Tax Department for unpaid taxes but also ensure proper compliances.

  In case of any observations or clarifications, the author can be reached at [email protected].