When is a gift not taxed under Income Tax?
Income from other sources, which is the last among the five heads of income sketched out in the Income Tax Act, is essentially a head of income that includes all receipts that cannot otherwise be classified under any of the other heads of income. According to section 56 of the Income Tax Act, the following 3 conditions need to be satisfied for a receipt to be categorized as income from other sources.
- There is an income.
- Such income is not exempted under any other provisions of the Income Tax Act.
- Such income cannot be charged as salary, income from house property, profits and gains from business or profession, or capital gains.
Gifts are something that are given voluntarily without expecting payment in return, to show favour towards someone, honour an occasion, or make a gesture of assistance. In India, one of the most common modes of transfer of property and money is by way of a gift. A gift can be a transfer of movable or immovable property or transfer of money from the giver to the recipient. Gifting is often used to transfer property or money within the family or to relatives by way of will or inheritance. However, gift has also been used as a medium to evade taxes.
The Indian legislative system sought to levy tax on gifts in the hands of the donor by enacting the Gift Tax Act, 1958. This legislation was abolished in 1998.Six years later, the Finance Act 2004 introduced section 56(2)(v) for taxing gifts in the hands of the recipient. Accordingly, today gifts received by an individual or Hindu Undivided Family (HUF) are taxed under the Income Tax Act.
However, there are certain situations where Gifts will not be taxed under the Income Tax Provisions. Given below are such situations where gifts will not be taxed:
Gifts below the monetary limit
- Gifts up to Rs 50,000 in a financial year are exempt from tax.
- However, if one receives gifts higher than this amount, the entire gift becomes taxable.
- For instance, if you receive Rs 75,000 as a gift from your friend, the entire amount of Rs 75,000 would be added to your income and taxed at your slab rate. It would be considered ‘Income from Other Sources.’ Here, the total value of all gifts received is counted.
- For instance, if you receive Rs 40,000 from one friend as a gift and Rs 15,000 from another friend, the limit of Rs 50,000 would be considered to be breached. The entire gift value (Rs 55,000) would be taxable in your hands.
Gifts from Relatives
Gifts from specified relatives are exempted, regardless of amount.
For this purpose, Relatives means
- Spouse of Individual
- Brother & Sister of Individual
- Brother & Sister of Spouse of Individual
- Brother & Sister of either of the parents of Individual
- Any Lineal ascendants or descendants of the individual
- Any Lineal ascendants or descendants of the spouse of the individual.
Basically, if you gift you spouse any gift, the same will be exempt under Income Tax Provisions, no matter what the amount of the gift is.
Gift of Movable Property where the Fair Market Value (FMV) is below the specified limit
- Where any person receives, from any person(s) any property other than immovable property without consideration, the aggregate FMV of which exceeds Rs 50,000, the whole of the aggregate FMV of such property will be taxable in the hands of receiver.
- Where any person receives, from any person(s) any property other than immovable property for a consideration which is less than the aggregate FMV of the property by an amount exceeding Rs 50,000, the aggregate FMV of such property that exceeds such consideration will be taxable in the hands of receiver.
- Basically, the excess differential amount will be taxable in the hands of receiver.
- In simple words, if a person receives movable property who’s aggregate FMV or the differential amount between consideration and FMV does not exceed Rs 50,000, then the same will not be taxable under Income Tax Act.
Gift of Immovable Property where the Stamp Duty Value is below the specified limit
- Where an immovable property is received without consideration and the stamp duty value of the property exceeds Rs. 50,000, then the stamp duty value of such property will be chargeable to tax.
- Where an immovable property is received for a consideration which is less than the stamp duty value, the difference between stamp duty value and consideration is chargeable to tax if such difference is more than the following two limits:
- Rs. 50,000; and
- 10% of the consideration
- In simple words, if a person receives immovable property who’s SDV or the differential SDV is below the specified limit, then the same will not be taxable under Income Tax Act.
Gifts received on account of Marriage
- The gifts received by the newly-wed couple from the immediate family or relatives on account of marriage are not taxable in India.
- The gifts can be in the form of house, property, cash, jewellery or stock or more are exempt from taxation.
- However, any income generated from the gifts received on the occasion of marriage are subject to tax.
- For instance, a couple received a house property as a wedding gift and they let out the property on rent. The income earned with this rent will be taxable. Also, if the couple sells the property in the future, the capital gains that will be generated will be taxable.
Some other Gifts which are exempt from tax
- Gifts given in contemplation of the death of the donor and gifts given under a will or inheritance.
- Gifts received from any local authority
- Gifts received from any fund, foundation, university, other educational institution, hospital, other medical institution or any trust or institution referred to section 10(23C)
- Gifts received from or by any trust or institution registered under section 12A or section 12AA
- Gifts received from an individual by a trust created or established solely for the benefit of relative of the individual.
You are required to file ITR if your income is above the basic exemption limit of Rs 2.5 lakh for individuals below the age of 60. If your income remains below the basic exemption limit even after receiving some gifts, it is not mandatory for you to file the ITR.
However, if you have received a gift of more than Rs 50,000, you should show it in your income tax return. This will work as a historical record and help you produce evidence in case of any future enquiry. If your income is above the basic exemption limit, it is mandatory for you to disclose your income from all sources including those from gifts, although you may not have to pay tax on it if it fulfils the exemption criteria.