Have you lately received a huge sum in cash from someone? Maybe you got a movable property for which you haven’t paid any monetary consideration? Remember to pay your gift tax – income tax on gifts received.
Since this a gift from someone you don’t really bother to find out about tax liability for the same. You ‘re probably thinking on these lines –
- the Gift Tax Act was abolished more than a decade ago.
- Why should tax authorities bother with me and my small gift when there are bigger fishes to catch?
With weddings, birthdays and festive occasions dotting our social calendar, giving and receiving gifts of different kinds and value is the norm.
Some of these are not considered taxable while some are.
If the sum or value is sizeable but received from certain individuals or groups, you don’t have to report the gift as income.
Where the gift is the kind chargeable to tax and you don’t disclose it, you may end paying a penalty in addition to tax, or worse still, considered a wilful tax evader.
Either pay the gift tax or plan wisely to limit or avoid tax as per IT Act.
Gift Tax – Income Tax on Gifts – Rates, Rules, Exemptions
How do you know which gift type is tax free and which are considered part of your income?
Like our other guides where we have tried to help you with tax related queries, this guide on Gift Taxation in India brings you valuable information basic rules, and taxes payable on certain items.
It will also show you different ways in which you can continue to give/receive gifts without worrying about tax liability.
We’ve tried to split into different sections with examples wherever required, so you easily access information that is relevant to your particular case.
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Why was an abolished Gift tax restored?
The original Gift Tax Act, 1958 laid down tax rules for gifts received by individuals and HUFs.
It was abolished in 1998 as a tax relief measure for middle class tax payers who gave and received gifts.
But when a lot of people, particularly business owners, stated misusing this system to launder money, accumulate black money, and create benami properties in the name of non-relatives, the finance ministry decided to step in to prevent further misuse. In order to that, they incorporated a gift tax system Section 56(2) of Income Tac Act, 1961.
WHAT qualifies as a Gift under tax laws?
The original Gift Tax Act had classified certain categories of items that fell under its purview.
The new tax rules for gifts continues to utilize this for identifying taxable and non-taxable monetary receipts and transferred assets.
Definition of gifts:
- Cash or cheque receipts.
- Immovable property including land, building, house or flat.
- Movable property including vehicles, securities, archaeological collection, bullion, jewellery, antiques, works of art, paintings and sculptures.
Related: Ultimate Capital Gains Tax Guide
Classification of gift and Gift Tax rates
The following items received by individuals and HUF may or may not be subject to gift tax, depending on the basic value clause and exemption categories:
- Gift receipts of Rs 50000 or lower each year –
Any assets or money received as a gift is valued at Rs 50000 or below in a year, it is considered as tax-free gift. If you receive two or three gifts (other the exempted gifts), the total amount has to be fifty thousand or lower.
- Gift receipts of more than Rs 50000 each year –
Assets that are valued above Rs 50000 will be considered taxable for the entire amount, unless tax exemption rules apply to such gifts.
- Immovable property – If the stamp duty value (SDV) of the gifted property exceeds Rs 50000, the entire value is taken as taxable income. If you’ve made part payment, then the balance of (SDV – Payment) will be taxable.
- Movable Property – If the fair market value (FMV) of the asset is estimated to be more than Rs 50000, the entire value is taken as taxable income. Here again, where part payment has been made by you, the balance of (FMV – Payment) will be taxable income.
GIFT TAX RATES
- The cash or cheque amount, stamp duty value of property and estimated value of other assets will be chargeable as income.
- You will have to report gift value under income from other sources.
- This gift income will be taxed along with your total income under the tax slab rates applicable to you in that financial year.
Gifts that are exempt from Tax
For all these exempted gifts, it is important that they be declared in the income tax return without fail for claiming exemption.
- Gifts received by an individual or their spouse for their marriage are completely exempt from gift tax –
- It doesn’t matter that the gift was given by someone who is not a close relative or friend.
- The estimated value of one or all gifts may exceed the Rs 50000 clause mentioned above, but will still not be charged to tax.
- However, gifts directly received by either set of parents or siblings on account of your wedding will not be exempt.
- If your uncle gifts you a car on your wedding day, it will be exempt from tax.
- Your parents gift you a house for your wedding, then it will be tax-free.
- If your office colleagues pool money together and buy you a gift worth Rs 50000 or more, it will still be tax-free in your hands.
- If your father or mother’s friend/distant relative gives them a pre- or post-wedding gift (for your wedding) – an LCD TV worth Rs 75000 and your parents don’t hand it over to you, the estimated value will be their gift income and taxed. In this case, the parent who receives the TV will have to include it in his/her income and pay tax on entire Rs 75000.
- Monetary gifts, movable assets or immovable properties received by an individual or HUF under certain conditions are completely exempt from gift tax –
- By legal heirs or nominees under will, succession or inheritance.
- By any employee or dependent of deceased employee from employer in the form of bonus, insurance, gratuity, pension or other sum solely in recognition of services rendered by said employee.
- Any sum received due to likely death of an individual, karta or member of a HUF.
- From local authorities in recognition or appreciation of specific and notable deeds like local or community service.
- From specified registered trust or institution as reward for academic and extra-curricular performance or notable service to society.
- From specified fund or foundation as reward for academic and extra-curricular performance or notable service to society.
- From university or medical institution as reward for academic or extra-curricular performance.
- Any amount received as gift from relatives is not taxable –
For this purpose, an individual’s relatives list includes:
- Parents, grandparents and great grandparents.
- Mother’s siblings and their respective spouses.
- Father’s siblings and their respective spouses.
- Brothers and their respective spouses.
- Sisters and their respective spouses.
- Your husband or wife.
- Your biological, adopted and step children and their respective spouses.
- Your grandchildren, great grandchildren and their respective spouses.
- Spouse’s parents, grandparents and great grandparents.
- Spouse’s brothers and their respective spouses.
- Spouse’s sisters and their respective spouses.
For this purpose, an HUF’s relatives list includes any member of the family.
- Gift payments by NRIs –
- When an NRI parent, child or relative (as defined in the list) transfer cash or property as gift, it is not taxable in the hands of the resident recipient.
- Gift of immovable property abroad is not taxable.
- Gifts to parents from NRE accounts of children are not taxable.
Clubbing of gift income
- Cash or asset gifted by individual to their spouse is exempt from gift tax, but any income earned from this gift in the form of interest or house rent is taxable. The spouse is charged for such earnings from gift, if they have taxable income or the income is clubbed with that of donor.
- Similarly, if a father-in-law transfers cash or asset as gift to daughter-in-law, any income earned from this gift will either be taxable in her hands or clubbed with father-in-law’s income.
- This rule is applicable to NRI in respect on income earned from gifts given by them to spouse or daugher-in-law.
Points to remember as Donor
- You don’t pay tax on money gifted to someone.
- You can’t deduct this value from your income.
- Income earned from this gift by your unemployed spouse or daughter-in-law alone is clubbed with your income.
- Further income earned from investment of earned income (from gift) is taxable in hands of receiver alone.
- For e.g.: You gift your unemployed wife 2 lakh rupees in March 2015. She gets an FD in her name on 1/4/2015 and earns 10% interest on it. The interest of Rs 20000 will be added to your income for financial year 2015-2016. She reinvests this interest in another FD and gets 9% interest on it for 2015-2016. The amount of interest income of Rs 1800 will be considered your wife’s own income.
- In the above e.g.: If you had gifted to unemployed sister, both original interest on gift and subsequent interest will considered your sister’s income and not clubbed with yours.
You can check on more FAQ from IT website here regarding Gift Tax questions.
How to benefit legally from gift tax exemptions:
- Income earned on invested gifts is not clubbed with donor’s income, if the investment in tax-free. Invest in PPF, EPF, listed shares or tax-free bonds as a gift in in your spouse’s name. Any interest earned on PPF or long-term capital gains earned on sale of bonds or equity shares will be tax-free. Learn to check epf balance enquiry here.
- Gift an investment or loan interest-free money to parents or siblings, especially when their total income is below the relevant threshold levels. Any income earned from the gift such as house rent or interest income will be chargeable as their income from other sources. They may end up paying zero tax, even after accounting for income earned from your gift or loan.
- Gift an investment or give interest-free loans to children who are 18 years and older. They should ideally be still studying or earning less than you. Any income earned from this gift will be taxed in their hands and not clubbed with your income.
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How to keep it legal and stress-free –
- Keep documentation available for the gift given or received, including gift certificate.
- When movable asset is received, ensure the donor provides a signed and stamped gift deed that has been attested by two witnesses.
- When immovable property is gifted, ensure the donor registers the property in your name and provides a signed gift deed that has been attested by two witnesses.
- If you’ve loaned your friend something in excess of Rs 50000 which he/she returns in a few months. Have a IOU note drawn or keep proof in the form of bank statements to prove this wasn’t a taxable gift transaction.
- You may have used your credit or ATM card to make a payment for a friend or colleague and they have transferred the amount to you later on. Keep the bank slips handy to prove this wasn’t a taxable gift transaction.
Have you gifted money or assets to relatives or friends not falling in the above list? While it is prudent that we have the knowledge, we must make them aware of their income tax liability on such gifts.
What is your experience with Gift Tax in India? Have you faced any issues before. Share this post and your experience.