Gifting is one of the common modes of transfer of money or property in India. It is also used as a tax planning or tax avoiding medium, due to which the government introduced the Gift Tax Act in 1958. This was abolished in 1998 and gifts have come under the Income Tax Act, 1961.
For the purpose of Taxation, a gift refers to the receipt of a sum of money, property or something in kind, by any person without or for inadequate consideration. For the receipt of gifts where the aggregate value exceeds Rs 50,000 in a year, the whole amount is taxable under section 56(2) of the Income Tax Act, with certain exceptions.
Gifts exempted from taxation
Any gift received by an individual from his or her relatives on any occasion is exempt from tax. A relative, for this purpose, means brother or sister, spouse, parents and their siblings, any lineal ascendants or descendants of the individual or his or her spouse.
A parent gifting Rs 1 Lakh to his son or a plot to the daughter is tax free. But a gift of Rs 1 lakh received from a friend or colleague, is taxable. In short, the gift received from friends or anyone other than the specified relatives are taxable.
A son, an NRI, living in the USA transfers Rs 10 lakhs to his parents in India. Will it be taxable? No, irrespective of the quantum of money (no upper limit) or the place of stay of the donor, if gifting is done among the specified relatives, it is exempt from tax. Likewise, parents in India can repatriate funds as a gift to their children staying abroad under the Liberalized Remittance Scheme (LRS).
Any money or property received under WILL or by way of inheritance or in contemplation of death of the payer or donor is not taxable. Suppose, legal heirs of the deceased get their share of property or money it is classified as not taxable.
What kind of gifts are taxable
Secondly, money received from anyone, on the occasion of the marriage of the individual is not a taxable gift. This implies, aggregate gifts received during the year, in excess of Rs 50,000, on birthdays, anniversaries, festivals, etc, are taxable.
Suppose, on your birthday, a friend gifts you Rs 20,000, a colleague gifts Rs 30,000 and a cousin gifts Rs.25,000 , the entire amount of Rs 75,000 is taxable, as the aggregate amount exceeds the threshold limit. If this was the wedding instead of the birthday, the entire amount is exempt from tax!
Gifts received from the employer up to Rs 5,000 a year are exempt from tax. For example, an employee gets Rs 15,000 as a gift from the employer, tax is levied on Rs 10,000.
Clubbing provisions
One must also know clubbing provisions under the Act, when the income is earned from the money, assets or property gifted by the husband. Say, if the woman gets a flat as a gift from her husband and earns, say Rs 3 Lakhs as annual rent, then the rental income is taxable in the hands of the husband as per Section 64 of the IT Act.
Likewise, gifts made to the daughter-in-law and minor child are taxed in the hands of the donor. Gifting immovable property to relatives are exempt from tax irrespective of the number of properties or the value of the property.
In case of unrelated party transactions, if the difference between the guidance value (value adopted for computing stamp duty) and the actual consideration exceeds higher of Rs 50,000 and 10 per cent of the actual sale consideration, then, the difference between the guidance value and the actual consideration shall be taxed in the hands of the buyer under section 56 and the seller has to pay capital gain tax under section 50C, considering the guidance value as the deemed value of the sale.
All gifts should be declared in their Income Tax Return. All exempt income received during the year should be declared under Schedule EI in ITR Form.
Should there be a written document in support of gifting? All immovable properties mandatorily require a duly registered Gift Deed as per Stamp Act and for gifting of movable assets or money, it is optional to execute the deed. However, it is advisable to make a Gift deed, (needn’t be registered) signed by both donor and donee, along with the witness. Lastly, avoid gifting with cash.
(The writer is a Chartered Accountant and Registered Valuer, Bangalore)