As per Section 43 (5) of the Income Tax Act, Speculative transaction is a transaction where a c...
In India, gifts are often exchanged between close knitted families and known acquaintances which acts as a symbol of socializing and showing affection. The taxability of gifts and how to show gift in an income tax return is one of the most sought after questions that are often raised in the minds of income 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 However, this legislation was repealed in October 1998; resulting in all gifts being made tax free. Thereafter, the Finance Act, 2004 introduced Section 56 of the Income Tax Act for the re-taxability of gifts in the hands of the recipient at normal tax rates. In fact, the income tax returns mandate the disclosure of taxable gifts received by an individual or HUF under the head “Income 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:
Where the below-mentioned conditions are met, any sum of money received without consideration by an individual or HUF shall be subjected to tax:
Thus, the aggregate value of sums received without consideration during a financial year shall be taxable as other income unless the aggregate value of such gifts is less than Rs. 50,000 when it would be exempt.
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.
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.
Under Section 56(2)(x) of the Income-tax Act, 1961, the provisions relating to gift tax can be summarized as follows:
Nature of Asset/Gift
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).
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:
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”.
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.
Despite that provisions relating to gift tax 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.”
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.