Gift tax in India like Income tax is a reality. Yes, when you exchange gifts between friends , family or even a casual exchange, all transaction have some tax implications. Read on to know more.
Who doesn’t like gifts? In cash or in Kind, gifts are always welcome, no? Sometimes we receive gifts on a particular occasion and sometimes we casually exchange money between friends and family members.
But what if I tell you that the gifts that you receive have some tax implications too? As in you might have to pay tax on the gift that you receive. Even your casual exchange of money has its consequences.
Just imagine that you collect Rs 1 lakh in the form of cash shagun on your child’s mundan ceremony, Rs 50000 worth of gifts on birthdays, on what account you will show this amount in your IT return. After all you have received some money.
Income tax laws require us to show the different sources of money so these can be taxed as per the provisions laid down. It is mandatory to report or document all the receipts and pay tax where ever applicable. Gifts are one of those sources.
Gift tax in India was initially introduced in 1958 but was abolished in 1998. It was reintroduced in 2004, under Income from other sources. Exchanging gifts can be a source of money laundering, so income tax officers while scrutinizing personal transactions do keep eye on the source of funds and taxability of gifting transactions. And thus it is equally important for you to understand the gift tax provisions and maintain necessary documents wherever required as the onus of proving the source is on you.
Gift Tax in India – Rules
Rules on Gift tax in India have been laid down under section 56(2)vi of Income tax act, which says that any gift/money received by Individual or HUF if exceeds Rs 50000 in a financial year will be added in gross total income and taxed under Income from Other sources. To calculate the value of the gift, following provisions apply:
- If gift is received in cash:
If in a single financial year, total receipts in the form of cash gifts exceed Rs 50000, then the total receipts will be taxed. In other words if the receipts are less than Rs 50000 then you need not to worry as these will be tax free, but if it exceeds Rs 50000 even by Rs 1000, then the total receipts will be added into the gross total income and taxed as per income tax slabs.
- If gift is in form of movable property:
Here also the figure of Rs 50000 will apply. If the gift is without consideration and the fair market value of gift exceeds Rs 50000 then the aggregate value of gift would be taxable. If the gift is with consideration, but for a lesser value than fair market value and difference exceeds Rs 50000, the difference in the value of FMV and consideration will be taken as taxable gift value.
- If gift is in form of Immovable property:
If property is gifted without consideration and stamp duty paid exceeds Rs 50000, then the stamp duty will be taken as gift value.
If property is gifted with consideration then difference between stamp duty value and consideration or purchase price, will be considered as gift value.
Isn’t this unfair to tax on gifts? After all gifts are given and received out of love and affection so why to pay tax on this. To answer this discontent, income tax act has provided some exemptions in gift tax in India rules, which are as follows:
Gift tax in India – Exemptions
There would be no gift tax in India if the transaction falls under the below mentioned criteria:
- If the gift amount in a financial year is below Rs 50000 then no gift tax provisions will be applied and the complete amount will be tax free.
- Any amount received from specified blood relatives is not at all taxable. Here the term relatives is defined as below:
b) Brother or Sister
c) Brother or Sister of Spouse
d) Brother or Sister of either of your parents
e) Any of lineal ascendants or descendants
f) Any lineal ascendant or descendant of Spouse
g) Spouse of the persons referred above
Below is the chart which explains the relations which can give tax free gifts.Click on the image to enlarge
*Do note that this chart is designed to the best of my understanding and before acting on anything or doing any transaction do consult some tax expert.
You can see that all of your close relatives have been listed in the exempted category. So whatever gifts (Cash or kind, money or property) you receive from your parents/siblings or others as stated above will be tax free in your hand. Just document a proper gift deed to clarify the source of the gift to Income tax authorities if asked for.
- Gifts received on the occasion of wedding from relatives or non- relatives are non- taxable. This provision if taken advantage of can help a lot in creating one more tax file in the family and support in family’s tax planning. Any amount of gifts received on this occasion is tax free. ( Read : tax planning tips for newly married couple)
- Whatever received as inheritance or through WILL is non-taxable in the hands of receiver.
- Any amount given to HUF by its members are tax free in the hands of HUF. Please note that this applies to only members, but if any outsider person gifts more than Rs 50000 to HUF in a single financial year then complete amount will be taxable for HUF.
- Gift Tax in India provisions also applies to NRIs as far as transactions in India is concerned. But they also have to check out the provisions laid down in the country where their source of earning lies, as they will be gifting money out of the earnings from other country.
Gift Tax in India – Procedure of Gifting
Whenever you receive something as gift, it is your responsibility to get the necessary documentation done and keep handy to show the source of funds to the Income tax officers if asked for.
In case of movable properties or cash there’s no such requirement of formulating a gift deed and just handing over the property or cash to the donee will solve the purpose, but it’s better to have a gift deed ( can be on plain paper)which explains the nature of transaction ( as out of love and affection), have name of the donor and donee with their Pan numbers duly signed by both parties. This gift deed gains more importance if the transaction is done in cash and not by cheque.
In case of Immovable property, gift transaction will be complete only after proper registration of gift deed and payment of respective Stamp duty. Registered Gift deed is mandatory requirement in case of immovable properties.
Tax planning through Gifting
Gifting helps in tax planning too, as it helps in spreading of family income into different heads and thus spreading of overall tax liability. But for proper tax planning you have to have understanding of Income tax clubbing provisions too.
Gift tax in India – Conclusion
Giving and receiving gifts is a common practice. But we should be aware of the law of land and understand the taxation behind such transactions. Though in most of the gift cases it is exempt as mostly it happens with in the family, but still we tend to make some casual transactions too like give and take between friends, cousins, which don’t fall in category of relatives.
Knowledge of defined relatives as per Gift tax in India provisions and having justification of every inflow coming into your bank account is very important for you to save your skin if you fall into Income tax scrutiny. Documentation of gift deed is also important.
Do you find article “Gift tax in India – Rules and exemption” useful? If you have any query on Gift tax in India do ask in the comments section below