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Receipt of gifts on various occasions is very common in India. You must have seen various occasions like birthdays, anniversaries, marriages, Diwali or other occasions, in which people exchange gifts. Ascertaining their taxability is one of the crucial areas you should be aware of as being ignorant in this case may land you with an income tax notice for tax evasion.
Ascertaining their taxability is one of the crucial areas you should be aware of as being ignorant in this case may land you with an income tax notice for tax evasion.
For understanding the taxability if gifts, the foremost thing is to understand the classification of gifts as per the Indian tax laws. This is as follows:
2. Immovable property
3. Movable property
Let us go about this one by one.
- As per the tax laws, any money (cash/ cheque/ draft) received which is in excess of INR 50,000 would be taxable as gifts in the hands of receiver.
- For example, if a person receives a cash gift of INR 100,000 from a friend on his anniversary, the entire amount of INR 100,000 would be taxable as gift since the amount exceeds INR 50,000. If the person receives a cash gift of INR 50,000, you need not worry as the whole amount would be exempt from tax as it is upto INR 50,000.
- It is to be noted that the cumulative value of all the gifts are taken into consideration. For example, if you receive a gift from a friend worth INR 40,000, no tax would be leviable. However, if you get another cash gift from the same person or even someone else of INR 11,000, the whole amount of INR 51, 000 (40,000+11,000) would be taxable as gift.
2. Immovable property (Land or Building or Both): Gift tax is not only applicable to gifts received in cash, but also in kind.
Case 1: Immovable property received without any consideration:
- If a person receives any immovable property without any consideration, the stamp duty value of such immovable property would be taxable in the hands of the recipient of the property, if such stamp duty value exceeds INR 50,000.
- For example, if a person receives any plot of land in India, stamp duty value of which is INR 10,00,000, the whole amount of INR 10,00,000 would be taxable as gifts in the hands of the person receiving the plot as the stamp duty value exceeds INR 50,000.
Case 2: Immovable property received for inadequate consideration:
- Here, inadequate consideration means as follows:
Stamp duty value – Actual consideration > 50,000
This means, if the stamp duty value is more than the actual consideration by more than 50,000, the difference would be taxable as gift.
- This means, if any person receives any immovable property for a significantly lower consideration (inadequate consideration), then the difference between the stamp duty value and the actual consideration would be taxable as gift in the hands of the receiver.
- For example, if a person receives any building, stamp duty value of which is 50,00,000 and the amount paid for the same is INR 20,00,000. In that case, since the difference between stamp duty value (INR 50,00,000) and the actual consideration (INR 20,00,000) is more than INR 50,000, the difference in their values, i.e. INR 30,00,000 would be taxable as gift in the hands of the receiver of immovable property.
- If the date of agreement and the date of registration is different, then the stamp duty value as on the date of agreement is to be taken instead of the date of registration provided atleast some part of the consideration has been paid on or before the date of agreement (payment should not be in cash).
If the stamp duty value is disputed by the person, the valuation may also be referred to a valuation officer and determined accordingly.
3. Movable property: Movable property is property other than land or building like jewellery, securities, archaeological collections, etc
Case 1: Movable property received without consideration:
- If any person receives any movable property without any consideration, the fair market value of such movable property would be taxable as gift, if such fair market value exceeds INR 50,000.
- For example, if a person receives jewellery from a friend on her birthday, the fair market value of which is INR 85,000. In this case, the entire amount of INR 85,000 would be taxable as gift in the hands of the person receiving such gift.
Case 2: Movable property received for inadequate consideration:
- Inadequate consideration here means as follows:
Fair Market Value – Actual consideration > 50,000
This means, if the fair market value is more than the actual consideration by more than 50,000, the difference would be taxable as gift.
- For example, if a person receives any shares, the fair market value of which is 75,000 and the amount paid for the same is INR 25,000. In that case, since the difference between the fair market value (INR 75,000) and the actual consideration (INR 25,000) is more than INR 50,000, the difference in their values, i.e. INR 50,000 would be taxable as gift in the hands of the receiver of immovable property.
It is worth to note that the fair market value of the movable property is determined as follows:
1. Jewellery: Price fetched in the open market in case sold on the valuation date
2. Archaeological collections, paintings, drawings, etc: Price fetched in the open market in case sold on the valuation date
3. Shares & securities:
Listed securities: Transaction value recorded on a recognized Stock Exchange
Unlisted securities: The value is determined by obtaining a valuation report from a merchant banker or a Chartered Accountant or simply the price fetched in the open market in case sold on the valuation date.
Exceptions to taxability:
Having discussed the taxability of gifts received in the forms of money, immovable property and immovable property, it is important to be aware of the exceptions subject to which these are taxable. The same is discussed as below:
1. Any gifts received from a RELATIVE:
• To avoid any kind of ambiguity, the term “RELATIVE” has been defined under the Income Tax Act. It covers the following:
a) Spouse of the individual
b) Siblings of the individual
c) Siblings of the spouse of the individual
d) Siblings of either of the parents of the individual
e) Lineal ascendant or descendent of the individual
f) Lineal ascendant or descendent of the spouse of the individual
g) Spouses of (b) to (f)
h) In case of any HUF, all its members
• For example, if you receive a gift of INR 200,000 from your grandfather, although the consideration is in excess of INR 50,000, the same would not be taxable as it is received from a relative.
• Thus, it is very important to determine the applicability of tax by strictly abiding by the above definition of relative.
2. Gifts received on the occasion of marriage
• Any gifts received on your marriage is completely tax free. This is definitely a good news as in India, the tradition of giving expensive gifts on the occasion of marriage is tremendous. The tax laws of India too have taken this into consideration and has made any gift received on occasion of marriage absolutely tax free.
• It is to be noted that only gifts received on your marriage is tax free. Any gifts received on any other occasion related to marriage like engagement, etc is taxable.
• For example, a person receives 1000 shares of Reliance Ltd from his friend as a gift on his marriage and the Fair Market Value of the shares is INR 100. In such case, the entire amount of INR 100,000 is exempt from tax.
3. Gifts received under a will or by way of inheritance
4. Gift in contemplation of death of the donor
5. Gift from any local authority
6. Gift from any recognized fund or organization
7. Gift from any registered charitable trust or institution
Lastly, I would like to enlighten you about other important general points related to taxability of gifts:
• The above provisions of taxability are only applicable in case gift is received by an individual or a Hindu Undivided Family (HUF).
• The gifts are taxable under the head “Other Sources”.
• The aggregate value of gifts received during the year is considered for taxability and not the value of individual gifts. Hence, if the aggregate value of gifts received during the year exceeds INR 50,000, then total value of such gifts would be chargeable and not just the excessive part.
• It does not matter whether the gift is received from abroad. Even if gift is received from abroad it would be taxable in the same manner as if received from India.
• An important point to keep in mind while receiving any kind of gift in the form of immovable property is that it should be executed through a registered gift deed to give it a legal sanctity. This would be helpful to establish your legal right over the immovable property and also in case you plan to further sell it.
I hope I have been successful in enlightening you about the taxability of gifts and the next time you receive any gifts; you are well aware of the related taxability aspects.