Tax Implication on Gifts Under Section 56(2)(VI) of Income Tax Act, 1961

Income Tax Act defines taxable gifts as under “gift means property which is a capital asset of the assessee (i.e., recipient), namely, Money, Immovable property being land or building or both, and Movable property being shares and securities, jewelry, archaeological collections, drawings, paintings, sculptures, any work of art or bullion” received without consideration or for an inadequate consideration.

Tax Free Gift

• Gift Received from the specified relative.
• This is further explained in next paragraph.
• Gift received from non-relative & relative on the occasion of marriage of the receiver are exempt from tax. It is important to note that the gift received from non-relative on other occasions like birthday, anniversaries and housewarming will attract tax if the aggregate value of gift exceeds ₹50,000.
• Gifts received by way of will or inheritance are exempted from tax.
• Gifts received in contemplation of death of the donor (i.e., gifts given by a person in anticipation of his/ her death in the near future).
• Gift received from a local authority, charitable trust, foundation or university or other educational institution or hospital or other medical institution.

Gift from relatives

Gift received from specified relative is exempt from income-tax in the hands of receiver. Thus, recipients of gift are fully exempt from income tax without any monetary limit.

Specified relative for the purpose of exempt gift means (i) spouse of the receiver; (ii) brother or sister of the receiver; (iii) brother or sister of the spouse of the receiver; (iv) brother or sister of either of the parents of the receiver; (v) any lineal ascendant or descendant of the receiver; (vi) any lineal ascendant or descendant of the spouse of the receiver; (vii) spouse of any of the persons referred to above.

Lineal ascendant of the receiver is his father/grand-father/great grand-father/mother/grand-mother/great grand-mother.

Lineal descendant of the receiver as well as from spouse side is the his/her children/grand-children/great grand-children.

Lineal ascendant from spouse side is her father-in-Law/grand-father-in-Law/great grand-father-in-Law/mother-in-Law/grand-mother-in-Law/great grand-mother-in-Law.

Taxable gifts

Other than above maintained exempt category, the following kind of gifts are taxable in the hands of the recipients:

1. Money: – This gift could be given in cash/cheque/electronic mode. If the aggregate value of money gift received during the year by an individual exceeds ₹50,000, the whole of the aggregate value of such sum is taxable as “income from other sources” in the hands of recipient.  The important point to be noted in this regard is the taxability of the gift is determined on the basis of the aggregate value of gift received during the year and not on the basis of individual gift.

Example: – Mr. Ganesh received gift of ₹1,15,000 from his Delhi’s friend and ₹25,000 from his Ranchi’s friend during the financial year 2022-23.

Ans: – In this case gift is received neither from relative nor on the occasion of his marriage and also the aggregate value of gift received by Ganesh’s exceeds ₹50,000. Therefore, entire ₹1,35,000 is taxable in the hands of Mr. Ganesh. It will be charged to tax under the head “Income from other sources“.

2. Movable Property:

If movable property is received without consideration:

The “aggregate fair market value” of movable property gift on the date of receipt would be taxed as the income of recipient in the year of receipt, if it exceeds ₹50,000.

If movable property is received for inadequate consideration:

If the difference between the “aggregate fair market value” and inadequate consideration exceeds ₹50,000, such difference would be taxed as the income of the recipient in the year of receipt.

Movable property is a capital asset of the recipient namely, – shares and securities, jewelry, archaeological collections, drawings, paintings, sculptures, any work of art or bullion. It is important to note that the movable property gift would be taxable only if such property is in the nature of a capital asset of the recipient and not stock-in-trade, raw material or consumable stores of any business of the recipient.

In this case also the taxability of the movable property gift is determined on the basis of the aggregate value of gift received during the year and not on the basis of individual gift.

Example: – Mr. Rohit purchased a motor car for ₹1,52,000, the fair market value of car is ₹2,52,000 during the year 2022-23. What will be tax treatment of motor car purchase?

Ans: – Motor car does not come under the definition of prescribed movable property, hence, nothing will be taxed in respect of purchase of motor car.

Example: – Mr. Sarthak purchased bullion for ₹5,50,000, the fair market value of the bullion is ₹ 6,70,000 and Gold jewellery purchased for ₹1,58,000, the fair market value of gold jewelry is ₹2,48,000 during the year 2022-23. What will be tax treatment of bullion and jewellery purchase?

Ans: – Gold jewellery and Bullion, as per above definition, are movable property. Both the properties are acquired for less than fair market value.  Further, these two properties are not acquired from specified relative. The excess of Fair market value over the purchase price will amount to ₹2,10,000 (₹9,18,000- ₹7,08,000) which is more than ₹50,000. Therefore, the entire excess of fair market value over purchase price i.e. ₹2,10,000 will be charged to tax in the hands of Mr. Sarthak. It will be charged to tax under the head “Income from other sources”.

3. Immovable Property:– Land and/or building may be received as a gift by an individual without consideration or for inadequate consideration.

(1) Where it is received without consideration (i.e., without paying anything for it) and the stamp duty value (i.e., value adopted by the authorities for payment of stamp duty) of such property exceeds ₹50,000, the entire stamp duty value of the property would be taxable in the hands of the beneficiary. Here the limit of ₹50,000 applies per property received.

(2) If the property is received for a inadequate consideration and difference between the stamp duty value and consideration is more than the higher of – ₹50,000 and 10% of the consideration, then, the stamp duty value in excess of the consideration would be taxable as income in the hands of the beneficiary.

The taxability of the immovable property gift is determined on the basis of individual gift.

For example, if the stamp duty value of the asset is ₹12,00,000 and the consideration is ₹9,50,000. Then the difference of ₹ 2,50,000 (which is more than ₹95,000 being higher of ₹50,000 and 10% of the consideration, i.e., ₹95,000) will be taxable as income from other sources in the hands of the recipient.

Example: – Mr. Ajit received a gift of flat from his Father-In-Law. The stamp duty value of the flat is ₹15,84,000. In this case whether the total value of gifted property will be charged to tax?

Ans: – In instance case immovable property gift (i.e., flat) is received without consideration from Father-in-Law. Father-in-Law is covered within the meaning of Relative. Therefore, entire value of gift received from relative will be exempt from tax in the hands of Mr. Ajit. It is immaterial that the stamp duty value exceeds ₹50,000.

Taxation of gifts received by NRIs

Non-resident Indian (NRIs) will have to pay taxes on gifts received in Indian or accruing or arising in India or deemed to accrue or arise in India. Gifts in the hands of NRIs will be charged to tax under the head Income from other sources.  Resident gift-giver has to deduct tax at the rate of 30% while giving gift to an NRI. However, where gift is given by “Resident” to another “Resident” there is no requirement to deduct tax at source (TDS).

Example: – Nainish send ₹58,000 to his NRI brother on his birthday and another ₹65,000 to his NRI friend as a Diwali gift.  Whether NRI will have to pay tax in India? Whether Nainish will be liable to deduct tax?

Ans: – Nainish’s brother fall in the category of specified relative. Therefore, his NRI brother will be exempted. Further, in this case Nainish will not be obliged to deduct tax. Nainish’s NRI friend will have to pay tax in India as the value of gift exceed ₹50,000. Further, this is not a receipt for which exemption is granted. In this case Nainish will have an obligation to deduct tax  at the rate of 30%.

Disclosure of Gift in Income Tax Return (ITR)

A taxpayer is liable to fully disclose gifts received, whether taxable or exempt, during the financial year while filing his/her ITR and taxes should be paid on taxable gift to avoid any litigation, disputes or penalties. This will work as a historical record and help you produce evidence in case of any future enquiry.