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Everyone loves to receive gifts. It is the nature of human beings to participate in the happiness of others and during such occasions, they like to bestow gifts to their friends and relatives. Gifts can be in the form of cash, cheques, demand draft, and other valuable material. Some people try to evade tax liability through gifts and this could be penalized. To avoid being penalized and make good use of tax planning an individual should be aware of all the aspects of the taxes on various gifts.
The gift tax was introduced by the Indian government in the year 1958 with the aim of imposing taxes on giving and receiving gifts under certain circumstances. All the gifts excluding a few exceptions were chargeable to the gift tax in the hands of the donor and were taxed at a flat rate of 30% with an exemption limit of Rs. 30,000.
The gift tax was abolished in 1998 and the gifts were made tax-free. However, the gift tax was reintroduced again under the Income Tax Provisions in 2004. As per the amended law of 2017 gifts received by an individual are taxed at the hands of the receiver as ‘Income from other sources and taxed at regular rates.
1) Treatment on tax for the monetary gifts received by an individual:-
The money received by an individual without consideration (i.e. monetary gift received through cash, cheque, draft) will be taxed if the sum of the money exceeds Rs. 50,000 during the year. The taxability is dependent on the aggregate value of the gift during the year and not on the individual gifts. If the aggregate value exceeds Rs. 50,000 then the total value of gifts will be charged to tax.
Gifts received from friends will be charged to tax.
2) The case where the monetary gift received by an individual is not charged to tax:
The monetary gift received by an individual will not be charged to tax in the following cases:-
a) Money received from relatives- Here the relatives could include the spouse of the person, brother or sister of the person, brother or sister of the spouse, brother or sister of either of the parents of the individual, any lineal ascendant or decedent of the individual or the spouse.
b) Money received during the marriage of a person- Marriage is the only occasion when the gift received by an individual is not charged to tax. On other occasions like birthdays and anniversaries the monetary gift received is charged to tax.
c) Money received from a local authority (section 10(20) of the income-tax act.).
d) Money received under inheritance.
e) Money received from the foundation, university, hospital, educational institution as referred in section 10(23C).
f) Money received from trust registered under section 12AA or 12AB.
g) Shares received as a result of the demerger or amalgamation of a company.
Example I) – Mr. Sharma received the following gifts in the year 2021-22; Rs. 2 lakh from a friend in London, Rs. 30,000 from his brother residing in Kolkata, and Rs. 1 lakh from a friend staying in Chennai on his birthday. How will all the above be taxed?
The aggregate value of the gifts more than Rs. 50,000 is taxed if received from a person other than a relative and on occasion other than marriage. Rs. 2 lakh received from his friend in London would be fully taxed. Rs. 30, 000 received from his brother would not be taxed as it is covered under money received from a relative, and Rs. 1 lakh received from a friend staying in Chennai would be fully taxed because birthday doesn’t come under the list of occasions that is not taxed.
Example II) – Mr. D’Souza receives Rs. 20,000 on 1-6-21 and Rs. 18,000 on 5-9-21 from two of his friends. How will the above be taxed?
Since the amount received from friends is charged to tax, but where the aggregate amount (Rs 20,000+ 18,000) of Rs. 38,000 is below the taxable limit of Rs. 50,000, he will not be charged anything to tax.
3) Taxation of immovable property received by a person:-
The immovable property (land or building) received by a person as a gift will be taxed when the stamp duty on the immovable property exceeds Rs. 50,000.
Immovable property received from friends as gifts are taxed.
4) When the immovable property received by a person as a gift is not taxed:-
a) The immovable property received as a gift by a person will not be taxed when it is received from relatives. The relatives in this case are; Spouse of a person, brother or sister of the person, brother or sister of the spouse, brother or sister of either of the parents of the person, any lineal ascendant of the person or his spouse.
b) Property received during the marriage. Marriage is the only occasion when the immovable property received as a gift will not be taxed. On rest occasions like birthdays or anniversaries, the immovable property received would be taxed.
c) Property received through inheritance.
c) Property received from the local authority (section 10(20) of the income-tax act.)
e) Property received from the foundation, university, hospital, and educational institution as referred in section 10(23C).
f) Property received from trust registered under section 12AA or 12AB.
Example:-Sagar gifted his house to his friend Nimesh. The market value of the house adopted by Stamp Valuation Authority was Rs. 10 lakhs. What are the tax implications for Mr. Nimesh?
In the above case, the house is received by Nimesh from his friend, the property is not received on any special occasion and the stamp duty exceeds Rs. 50,000. So the stamp duty value of the property i.e. Rs 10 lakhs would be charged to Nimesh under the head’s income from other sources.
5) An immovable property received for inadequate consideration (the property is purchased at a price lower than the Stamp duty value of the property)
It is taxed when the Stamp duty value of the gifted immovable property exceeds the purchase price by more than Rs. 50,000; the difference between the Stamp duty value and the purchase price of the gifted property is taxable.
Example– If the Stamp duty value of the gifted property is Rs. 2.2 lakh and the purchase price is Rs 1.2 lakh, the taxable amount is 1 lakh (2.2 lakh-1.2 lakh)
6) Tax treatment of movable property received as a gift by a person.
The movable property includes jewelry, shares, drawings, paintings, sculptures, artwork, and bullion. When the aggregate fair market value of the movable property received by the person exceeds Rs. 50,000, it will be treated as the income of the receiver.
7) When the movable property of the person is not taxed:-
a) The movable property received as a gift by a person will not be taxed when it is received from relatives. The relatives in this case are; Spouse of a person, brother or sister of the person, brother or sister of the spouse, brother or sister of either of the parents of the person, any lineal ascendant of the person or his spouse.
b) Movable property received during the marriage. Marriage is the only occasion when the immovable property received as a gift will not be taxed. On rest occasions like birthdays or anniversaries, the immovable property received would be taxed.
c) Movable property received through inheritance.
c) Movable property received from the local authority (section 10(20) of the income-tax act.)
e) Movable property received from the foundation, university, hospital, and educational institution as referred in section 10(23C).
f) Movable property received from trust registered under section 12AA or 12AB.
Example –
Mr. Ramesh received shares from his father the fair market value of which is Rs. 1.75 lakhs, jewelry from his friend and the fair market value is Rs. 70,000, and jewelry from his friend and relatives on the occasion of his marriage worth Rs. 4 lakhs. How would he be taxed?
He will not be charged anything on the shares received from his father as it is covered under the definition of a relative. He would be taxed for jewelry the fair market value is Rs. 70,000 as it is received from a friend and doesn’t come under the definition of relative. The third case is during marriage and it is covered under special occasions, so he would not be charged anything.
8) When the movable property is bought for a consideration (i.e. bought by a donor before being gifted)
When the fair market value of the gift exceeds the purchase price by more than Rs. 50,000 the difference between the fair market value and the purchase price of the gift is taxed.
Example- If the fair market value of the painting being given as a present is Rs. 3.5 lakhs and the original purchase price is Rs. 2 lakh the taxable amount is Rs. 1.5 lakh( 3.5 lakh- 2 lakh).
Gift deed-
When you wish to give a gift to your near and dear ones, you can do it through a gift deed. A gift deed is a legal instrument through which a person transfers his movable or immovable property to another person without consideration as a gift. The person who gives the gift is called the donor and the person receiving the gift is called the donee. The gift of immovable property is effective when registered with the registrar and that of the movable property when the gift deed is registered.
Suppose your relative transfers a sum of Rs. 12 lakhs to your bank account, you may be required to justify the source of this money. The thing you can do is prepare a gift deed that would act as evidence of the gift. The same can be followed with immovable property received as a gift. You can also keep other documents such as the bank statement or the copy of the cheque that you received.
The gift deed should include:-
- Name, address and relationship between the donor and the donee.
- It should mention that the donor is transferring the gift property out of love and affection and there is no consideration involved.
- It should also mention that the property is being transferred voluntarily without any fear or threat.
- Signature of two witnesses.
- Signature of the donor and the donee.
A few things to remember:-
- Gift from a spouse is exempt from gift tax but the income earned will be clubbed with the person’s income and taxed. Suppose a husband gives Rs. 10 lakhs as gift to his wife and she invests in a FD earning 5% interest P.A., then the amount of Rs. 50,000 earned will be clubbed with the husband’s income.
- Gift received by a minor is taxable and will be clubbed with the parent earning highest income, if both the parents have taxable income.
When a person receives large amounts of expensive gifts it is better for him to maintain all the records which will help him to explain the source of gifts whenever required under the law on gift tax.