Taxation of Gifts in India

Many times I have come across questions relating to the taxation of gifts in India. People often present various scenarios of property (movable or otherwise) passing from one individual to the other and seek clarifications if such transactions attract any tax liability - both on acquisition and disposal of such property. To understand the provisions relating to gifting in India, let's cover its background and the current provisions.

A gift is something given away willingly to someone without any payment or consideration in exchange. So if something of value is given away without any payment or something in return, out of the free will of the doner, it is termed as a gift. Gifts have a very special place in Indian society where valuables are gifted as a matter of accepted customs. In addition, valuables also get passed on from one person to the other as part of an inheritance or Will upon the death of the owner. While the exchange of gifts between related individuals is part of our customs, the exchange of gifts between individuals not related to each other may be a potential source of corruption. Accordingly, the law treats both these transactions in different ways. 

Gifts were subject to tax under the Gifts Act 1958 (GTA) which was later repealed in 1998. Hence gifts of all types remained exempt from tax for the next six years till 2004 when the Income Tax 1961 was amended to bring gifts of certain types within the ambit of taxation. A new provision under Section 56 (2) was introduced in the Income Tax Act 1961 to tax gifts in the hands of its recipients as "Income from Other Sources". This provision has since been amended a few times with the last amendment in 2017 [Sec 56 (2) (x) of the Income Tax Act]. 

With the amendment in 2017, all categories of taxpayers (not only individuals or HUFs) are liable to taxation on the value of money or properties received without any consideration (or inadequate consideration) as "Income from Other Sources", if the value of the benefit exceeds Rs. 50,000/-. It implies that gifts of value up to Rs. 50,000/- (aggregate value in Previous Year) are not taxable.  

A. Money as Gift.    In the case of money, if the total value of such gifts received in the previous year exceeds Rs. 50,000/-, the whole of money received in the previous year, shall be liable for taxation. 

B. Immovable Property as Gift.    In case the immovable property is received without any payment and the stamp duty value exceeds Rs. 50,000/-, the whole of stamp duty value shall be taxable. However, if the payment is made for such immovable property and it falls short of the stamp duty value (inadequate consideration) by more than Rs. 50,000/-, the difference between the stamp duty value and the payment already made, shall be taxable. 

C. Other Moveable Properties.    In case of any property, other than the immovable property, is received without any payment and 'fair market value' of such property exceeds Rs. 50,000/-, the total value of such property(ies) received during the previous year shall be taxable. However, if the payment is made for such immovable property and it falls short of the fair market value (inadequate consideration) by more than Rs. 50,000/-, the difference between the fair market value and the payment already made, shall be taxable. 

The Exceptions to the Rule.    However, the above provisions do not apply in case such money or property is received under the following conditions:- 

1. From any relative (spouse, brother or sister, brother or sister of the spouse,  brother or sister of either of the parents, any lineal ascendant or descendant of individual or spouse, spouse of anyone referred so far).

2. On the occasion of the marriage of an individual.

3. Under will/inheritance / from a trust created for benefit of the individual.

4. From any local authority / charitable institutions.

5. Under the scheme of amalgamation/demerger.

The above provisions can be easily understood with the help of the following diagram.

Once the money or property received as a gift has been taxed or not taxed as per the provisions indicated above, any subsequent income generated / or gain on its disposal, will be liable for taxation as per the provisions of the Income Tax Act.

 

In case of any further queries, please feel free to email them to me.

Prashant Gupta

Last Updated on 28 Dec 2020 (2000h)