The Gift Tax Act of 1958 was abolished in 1998, and with that those givers as well as giftees were no longer required to pay taxes on the gifts. However, this settlement led to bogus capital-building and money-laundering cases.
Following this, former finance minister P. Chidambaram in the budget of 2004 stated: “I abolished Gift Tax in 1997. That decision remains, but the loophole requires to be plugged to prevent money laundering.” And with that, section 56(2)(v) was introduced under the Finance Act 2004 for taxing gifts in the hands of the receiver. Accordingly, today, any gifts received by an individual or Hindu Undivided Family (HUF) are taxed under the Income Tax Act, unless they fall under the category of any exemption.
Also the gifts, which are not under the exempt category, need to be disclosed in Income Tax Return (ITR) and taxes need to be paid accordingly. Failure of which can attract penalty. Naveen Wadhwa, DGM, Taxmann.com, said, “No special rates have been prescribed for taxability of gifts. The same shall be taxed at normal rates applicable on the recipient in the year of receipt of such gifts. Gifts need to be disclosed in ITR and any non-disclosure may attract the penalty of 50 per cent to 200 per cent of tax payable on income sought to be evaded.” Further the value of gifts needs to be included in the receiver’s total income that falls under the head ‘income from other sources’.
For any gifts received (in form of cash, movable property or immovable property), which exceeds `50,000, the entire value of gift is taxable in the hands of the recipient. For example, if you receive a gift worth Rs80,000 in a tax year, then you are required to pay tax on the full amount. However, if it is less than Rs50,000, then you are not liable to pay tax. Ravi Jain, Partner and Leader Personal Tax, PwC India, said, “However, gifts received of any value from relatives (like spouse, parents, grandparents, siblings or in-laws) specified in the law is exempt, but the same is true for non-relatives (except employer) only if they are received on special occasions like marriage.” (See the Table: Exemptions on Gift Tax). However, in case if an income is arising out of that gift from a close relative, then the amount is again taxable. Further the tax-free limit for the gifts received from friends is Rs50,000 per year. For example, if you have received two gifts worth Rs30,000 each, then you are breaching that Rs50,000 exemption limit and the whole amount of Rs60,000 would be taxed for rather than the difference Rs10,000.
When it comes to gifts received during a wedding, they are tax exempted. However, there is a complete constraint on accepting any amount in excess of Rs2 lakh in cash. Wadhwa explained, “If the newly-wed couple receives gifts in cash and if it exceeds `2 lakh from one person, the tax department shall levy a penalty of an equivalent amount. All gifts above Rs2 lakh should be received by way of account payee cheque, draft, credit card or through net banking.” If a gift received from an employer in the form of gift vouchers, tokens on festive occasion like Diwali, Dusherra or Christmas exceeds Rs5,000, then it is considered as part of your salary and taxed as per your tax slab. The exemption is limited for gift amount lesser than Rs5000. However, in case the employer presents you with cash, then there is no tax exemption.
In the case of gifting any immovable property that can be land or building, which is received without monetary consideration, it usually needs to be registered and taxes are expected to be paid in certain cases.
The recipient would be required to pay income tax if the stamp duty value or circle rate of such property exceeds Rs50,000. However, in case of immovable property, if it is less than its stamp duty value by an amount exceeding Rs50,000 or five per cent of the consideration, whichever is higher, the excess amount shall be taxable in the year of receipt.
Gifts in form of property other than immovable property, which includes shares and securities, jewellery, archeological collections, drawings, paintings, sculptures or any work of art, also attract tax. “When any immovable property is received without consideration and the fair market value of such immovable property exceeds Rs50,000, the fair market value of such property shall be assessed to tax as gift in the year of receipt,” said Wadhwa. (See the Table: Gifts covered and its taxation aspect). In case of transfer of movable or immovable property in form of a gift, a gift deed (document) needs to be prepared to records the act. The deed should mention that the gifting process was a voluntary action made without any kind of coercion.
It is always crucial to maintain a record of gifts as well as documentation of assets you hold, in the form of gifts received. This would ensure in determining what is taxed and what is exempt.
A gift which is nothing but a source of joy shouldn’t turn into a source of worry. For the recipient understanding how gifts are taxed in India goes long way as he or she learns to bear the responsibility of paying tax.