Taxation on Gifts
India is a country with a rich heritage and culture. Owing to this, Indian families always need a reason to celebrate and enjoy its diversified customs and religions. And when it comes to celebrations, Indian celebrations are incomplete without exchanging gifts. We Indians believe that gifts act as a symbol of love and affection for one another and build bonding between people in today’s era of modernization.
But have you ever thought that the gifts you buy or receive from people are taxable or not?
In this article, we will shed light on the taxability for gifts and the various scenarios under which the gifts would be taxable.
Tax on Gifts in India
The Parliament of India introduced Gift Tax in 1958 under the Gift Tax Act, 1958 with the purpose of imposing taxes on giving and receiving gifts under some specific scenarios. According to the Income Tax Act 1961, the gift will be taxable only when the value of the gift would exceed INR 50,000 in the hands of the recipient or basically the person who receives the gift. In simple words, Gifts received up to the amount of INR 50,000 are completely tax-free but if this limit is breached, the entire amount of gifts will be taxable.
As per the law, the gift would be taxable under the head “Income from other sources”, Section 56(2) of Income Tax at normal tax rates. Gifts can be anything having value such as cash, cheque or demand draft, gold, diamond, etc.
Also many times it has been seen that gifts can sometimes be considered as a part of tax planning or we can say tax evasion. But one should know that if tax planning is done within the framework of law then it is permissible and on the other hand, tax evasion is completely prohibited as per the law and the concerned person can also be penalized.
However, the Gift tax act introduced by the government of India was abolished in 1998, and in lieu of this, all gifts were tax-free. Later, the act was reintroduced in a new format in the year 2004.
So to avoid any type of ignorant tax outflow, it is important to have a basic idea regarding this topic.
EXEMPTIONS FROM LEVY OF INCOME TAX ON GIFTS
As per the provisions of the Income Tax Act, the gift tax will not be levied under the following circumstances -
1. Gifts received from relatives
Any type of gifts received from relatives is fully exempted from tax and no income tax would be levied on them. Also, there has been a lot of confusion regarding the classification of relatives and who all would be counted as relatives. So to clarify this concern, Income Tax Act has laid down that in the case of individuals, only the following kind of people would be counted as relatives and exemption can be claimed against these only:
Spouse of the individual
Siblings of the individual
Siblings of the spouse of the individual
Siblings of either of the parents of the individual
Any Linear ascendant or descendent of the Individual
Any Linear ascendant or descendent of the spouse of the Individual
In the case of HUF, all the members of the family would be considered as its relatives.
NOTE – All the gifts received from relatives are exempted from gift tax irrespective of the value of gifts meaning that there is no maximum limit on the value of gifts.
2. If the aggregate value of gifts received is less than INR 50,000
If the aggregate value of gifts (cash or kind) received from a person (other than a relative) does not exceed the limit of INR 50,000, then there would not be any tax charged on him/her. But if the aggregate would exceed the exemption limit then the entire amount will be taxable exceeding the limit. Let us understand with the help of an example –
Suppose if a person Mr. R receives gifts from two people say Mr. X and Mr. Y of value INR 20,000 and INR 10,000 respectively. In this particular case, no tax would be levied as the aggregate value does not exceed INR 50,000.
But if Mr. R receives gifts of value INR 40,000 and INR 20,000, then in this case Mr. R is liable to pay taxes as the aggregate value exceeds the exemption limit of INR 50,000.
3. On the occasion of the marriage of an individual
Any kind of gift received by an individual on the occasion of his/her wedding is fully exempted under the law. Also one must note that the gifts received by a person at his/her wedding are only exempted and not the gifts received on the marriage of their son/daughter/siblings.
4. Cash or rewards received by any local authorities as defined in Section10(20)
5. Cash or rewards received by educational institutions on the basis of merit is exempted Gifts received from any fund or foundation or university or other educational institution or hospital or other medical institution or any other trust or institution referred to in Section 10(23C) or Gifts received from any fund or Institution registered under Section 12AA
6. Gifts received under a Will or by way of Inheritance or in contemplation of death of the payer
So pay your Income-tax return wisely considering all the factors and exemptions and take professional help if needed as health should always be the priority be it
financial health or otherwise. Also, it is always advisable to maintain proper documentation regarding such exemptions so that you can justify your transactions.