Gifting In India Tax-free or Taxable?
Gifts have always been a cherished way to express love, appreciation, and support across cultures. They can range from small tokens of gratitude to substantial financial or physical assets. However, in India, the act of gifting is not just an emotional exchange it is also subject to the watchful eye of the Income Tax. Certain gifts are taxed in India, making it essential for both the giver and the receiver to understand the implications. In this article, we'll be discussing the taxation rules surrounding gifts in India and the potential tax liabilities that may arise from this seemingly benevolent act.
Does India have Gift Tax?
In India, the Gift Tax Act was introduced in 1958 but later, got abolished in 1998. However, before you start celebrating, it's important to note that gifts are still subject to taxation under the Income Tax Act, 1961. These rules now fall under Section 56(2)(x) of the Income Tax Act where the tax implication is in the hands of recipient of the gift.
What is Gift as per Income Tax Act?
As per Income Tax Act, any money, property, either movable or immovable, received by an individual from another individual or organization without having to pay any consideration i.e. without any payment in return, is referred to as Gift.
From taxation perspective, gift can be classified into following categories:
1. Money received, including cash, cheques, drafts, and bank transfers.
2. Movable property received without consideration or for inadequate consideration i.e. at a price lower than the fair market value of the property. (It includes shares, bonds, jewellery, sculptures, paintings, and other valuable possessions.)
3. Immovable property received without consideration or for inadequate consideration i.e. at a price lower than the stamp duty value of the property. (It includes land, building, residential property, commercial property etc.)
2. Movable property received without consideration or for inadequate consideration i.e. at a price lower than the fair market value of the property. (It includes shares, bonds, jewellery, sculptures, paintings, and other valuable possessions.)
3. Immovable property received without consideration or for inadequate consideration i.e. at a price lower than the stamp duty value of the property. (It includes land, building, residential property, commercial property etc.)
How to determine the Taxable Value of Gift?
The Income Tax Act via sub-section (2) of section 56 provides a guideline on how to determine the taxable value of gifts, both monetary and non-monetary. The table below outlines how to determine the taxable value for different types of gifts:
| Type of Gift | Gift Tax Implication | Taxable Value of Gift |
|---|---|---|
| Cheque, cash, or bank transfer | If the value of the gift is more than ₹50,000 | The entire amount of money received as gift |
| Immovable property like building, land, etc., received without consideration (without making any payment) | If stamp duty value of the gift is more than 250,000 | The difference between the stamp duty value and the purchase price paid is taxable. |
| Immovable property for inadequate consideration (i.e. purchased at a price lower than the stamp duty value of the property) | If stamp duty value of property exceeds higher of the following -1.Rs. 50,000 2.By amount equal to 10% of the purchase price | The difference between the stamp duty value and the purchase price paid is taxable. |
| Movable property like shares, jewelry, paintings, sculptures, etc. without consideration (without making any payment) | If the fair market value of the gift is ₹50,000 | The fair market value of the gift |
| Movable property like shares, jewelry, paintings, sculptures, etc. for inadequate consideration (i.e. at purchased at a price lower than fair market value of the property) | In case the fair market value of the gift exceeds the purchase price by more than ₹50,000 | The difference between the fair market value and the purchase price of the present is taxable |
Taxation on Gifts - Exemptions
The Income Tax Act provides specific exemptions for gifts received, particularly for those from close relatives or in special situations such as weddings or inheritances. Below is a detailed summary of the gift tax exemptions available. There would be no tax implication where gift is received-
- from relative*;
- on the occasion of the marriage of the individual;
- under a will or by way of inheritance;
- in contemplation of death of the payer or donor, as the case may be;
- from any local authority as defined under section 10 clause (20);
- from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10 clause (23C);
- from or by any trust or institution registered under section 12A or section 12AA or section 12AB;
- from an individual by a trust created or established solely for the benefit of relative of the individual;
- by way of transaction not regarded as transfer as per section 47
*Definition of Relative
Gift received from relatives do not attract any tax implication in India under Income Tax Act. As per Explanation provided to Sec 56(2), below mentioned person fall under the definition of relative
in case of an individual
i. spouse of the individual;
ii. brother or sister of the individual;
iii. brother or sister of the spouse of the individual;
iv. brother or sister of either of the parents of the individual;
v. any lineal ascendant or descendant of the individual;
vi. any lineal ascendant or descendant of the spouse of the individual;
vii. spouse of the person referred to in items (ii) to (vi); and
ii. brother or sister of the individual;
iii. brother or sister of the spouse of the individual;
iv. brother or sister of either of the parents of the individual;
v. any lineal ascendant or descendant of the individual;
vi. any lineal ascendant or descendant of the spouse of the individual;
vii. spouse of the person referred to in items (ii) to (vi); and
in case of a Hindu Undivided Family, any member of the HUF.
Tax Savings through Gifts
When giving a gift to someone who isn't a close relative, keep in mind that the maximum amount or maximum value of the gift you can transfer without triggering tax is ₹50,000. Anything above this limit will be taxed based on the recipient's tax bracket.
However, there's a way to reduce giver's tax liability: consider clubbing gifts. This approach is especially beneficial when gifting to close family members, as mentioned in para above. The amount or value of gift does not increase the total taxable income of the recipient of gift, however, any income generated from investing such gifted money, would be subject to tax in the hands of the recipient. So, giver's tax burden remains unaffected.
Having said that, it's important to note that the income tax department closely monitors gift transactions, particularly when large values are involved. Therefore, it's advisable to maintain proper documentation (such as gift deed) to prove your gifts are genuine, especially when dealing with expensive items.
However, there's a way to reduce giver's tax liability: consider clubbing gifts. This approach is especially beneficial when gifting to close family members, as mentioned in para above. The amount or value of gift does not increase the total taxable income of the recipient of gift, however, any income generated from investing such gifted money, would be subject to tax in the hands of the recipient. So, giver's tax burden remains unaffected.
Having said that, it's important to note that the income tax department closely monitors gift transactions, particularly when large values are involved. Therefore, it's advisable to maintain proper documentation (such as gift deed) to prove your gifts are genuine, especially when dealing with expensive items.
How to Declare Gift received in Income Tax?
Under the current Income Tax regulations in India, receiving a gift is treated as a taxable event, meaning you are responsible for declaring the gift and paying taxes, if applicable. To determine the tax liability, you must report the value of the gift while filing your Income Tax Return under the head "Income from Other Sources". The value of gift is then added to your total annual income, and your tax liability is calculated based on the applicable income tax slab rate.
Conclusion
While gifting is a wonderful way to express affection, appreciation, or support, it is essential to understand the tax implications involved. By staying informed about exemptions, taxable thresholds, and potential tax-saving strategies, you can ensure compliance with the provisions of the Income Tax Act while expressing your affection or support. Careful planning, proper documentation, and a clear understanding of tax laws will help you gift wisely and avoid unnecessary tax liabilities. It is advisable to seek professional advice if you are uncertain about any aspect of gifting to ensure a smooth and tax-efficient experience.