Gifts Tax Act was introduced in India firts time in 1958 as gifts can be a big source of money laundering if there are no limits. But this tax was abolished in 1998. Realizing the misuse it was introduced again in 2004 thus making gifting a taxable transaction under head “Income From Other Sources“. So now any gift you receive from a friend or relatives above a threshold limit is your taxable income. However, taxing gifts from all sources may be a difficult situation as there are relations where gifting is more for care and emotions. To avoid this, relief is given to gifts received from most close relatives. Also, amendments were made recently for gifts by members to HUF, making gifts more tax friendly.
So where you have to pay tax if you receive assets or money as gifts and where you will be exempted is what I have discussed below.
The Gift Tax
When gift tax was introduced in 1958, any gift worth more than Rs 25000 were subject to tax. From preview of gift tax any cash, cheque or a draft received form non blood relative was considered as a gift. This was abolished in 1998 and so all gifts of any amount from anyone became tax free. However, it became a good source for money laundering and to curb it the gift tax was reintroduced in 2004. Now, any gift received by Individual or HUF in excess of Rs 50000 is subject to gift tax and is taxed as Income From Other Sources under Sec 56(2) (vi). This has following elements-
- Cash– Where any sum of money above Rs 50000 is received without consideration, then the entire amount is is liable to income tax as income from other sources.
- Immovable Property– As per changes by Finance Act 2013 any immovable property received by an Individual or HUF, for a consideration lower than stamp duty value of the immovable property by an amount exceeding Rs 50000, then the difference between stamp duty value and the consideration or purchase price will be taxed in hands of the buyer.
- Movable property– In case of movable property also the situation is similar. If the aggregate Fair Market Value of movable property received without consideration exceeds Rs 50000 then the entire aggregate value will be taxable. However, if the movable property is received for a consideration that falls short of the aggregate FMV by more than INR 50,000, the difference between the aggregate FMV and the consideration will be taxed as income from other sources.
If above provision of gift tax is applied on all relations then it can be a huge dissatisfaction for many where it is more for the love and care. To avoid this, income tax has exempted certain situation from paying any income tax on any amount of gift received.
When Gift Tax Is Exempted
- Gift received by Specified Blood relatives, irrespective of the gift value
- Immovable properties located outside the country
- Gifts received from relatives on the occasion of marriage. Even the gifts received by daughter-in -law from parents-in-law is exempted but gifts received by son-in-law from parents-in-law will be taxed
- Money or property received by way of a Will and Inheritance or in contemplation of the death of the payer is exempt from tax
- NRIs gifting parents in India from their NRE account
- HUF receiving gift from its Members
- Gift from any local authority (as defined under section 10(20)) or from any fund / foundation / university or any trust / institution referred to in section 10(23C) or registered under section 12AA
In all above cases no tax is levied for any amount of gift . To ease it further following are the relatives as defined in the income tax in consideration of gifts received by Individual or HUF –
- Spouse of the individual
- Brother or sister of the individual
- Brother or sister of the spouse of the individual
- Brother or sister of either of the parents of the individual
- Any lineal ascendant or descendant of the individuals
- Any lineal ascendant or descendant of spouse of the individuals
- Spouse of the Brother / sister of individual or brother/ sister of spouse of individual
- Any Member of HUF
How You Can Gift?
Considering the provision available in income tax, gifting can be a viable tax planning tool. But how should you gift as it involves movable and immovable properties. In general, there is no legal requirement for gifting movable properties. By handing such items physically gifting provision will be allowed. But its always advisable to document it in a gift deed to avoid any confrontation. However, if you are gifting a real estate, then the transfer can happen only through a registered gift deed. In both these cases the stamp duty is still payable but the mandatory requirement of a gift deed is for immovable property.
The Income From Gift
What if the amount received as gift is invested further or the assets is generating income? Does it also qualifies for a tax free status? Take the case of a minor. If grandparents gift a large amount of cash to their grandchildren and parents invest it for their future, then the investment will earn capital gains or interest. So how this income will be treated? As per income tax any income earned from assets received as a gift will not be tax exempt but will be treated as individual/HUF income. So in above case if the income is of a minor, clubbing of income provision will apply. This means any investment earned on this investment will get clubbed with income of the parent and so the parent will have to pay income tax. Similarly, if NRI gift money to their parents in India and they in turn invest this amount, the income will form portion of their earned income.
Planning through Gift
If you want to transfer any property to your loved ones while you are living gifting can be utilized. If you have formed a HUF then now all members can gift assets to it and HUF does not have to pay any tax on it. Similary NRIs living abroad who wants to ensure their parents have enough money for their needs can gift to them. You can gift assets to your near relatives through Will. All these are situations where there is no limit on the amount or value of the assets.Thus gifting in many instance can be a good tool for tax planning where you do not want the receiver to get subject to any tax for the gift you wish to make.But while gifting any property to your loved ones, especially if it involves a legal registration, ensure you take the assistance of a competent lawyer as even a gift deed can be contested in court.
The tradition of gifting in marriages, anniversaries, birthdays or small occasion of bonding together will remain forever. Make gifts to your loved ones but do remember provisions of income tax as the onus will be on the receiver.
Have you gifted any large sum of money or assets to your relatives not falling in the above list? Are they aware on the income tax provisions?
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