Taxation on Gifts u/s 56(2)(x)(b) of Income Tax Act, 1961

Who does not like to receive the gift? I guess we all do. Right! Whenever there is an important occasion or festival, exchanging gifts is a common trait of people. But Very few of them know that there are certain income tax implications of gifts. 

In this blog, we will discuss the tax implication under section 56(2)(x)(b) including relevant provisions. So, Read on before giving or receiving a gift.  

First of all, before receiving any gift from anyone, just ensure that the gift is from a real or genuine person or source. It must not be related to proceeds of crime, black money, or scammers. 

Especially for high-value gifts, it's a good idea to consider registering the gift with a gift deed. This involves paying the necessary stamp duties as determined by the relevant State Government. Doing so helps the recipient establish the authenticity of the transaction as a gift rather than a sale-purchase when the tax department investigates.

According to the Income Tax Act, taxable gifts are defined as property that the recipient (the person getting the gift) receives without paying for it or for an amount much lower than its actual value. This property can include things like money, land, buildings, shares, jewelry, artworks, or precious metals.

What are the Tax-Free Gifts?

Below is the list of the gifts which are tax-free.

1. Gifts from Close Relatives: Gifts from close family members are usually tax-free. More details are explained below.

2. Marriage Gifts: Gifts received during your wedding, whether from relatives or non-relatives, are exempt from tax.

3. Other Occasions: However, if you receive gifts on occasions like birthdays, anniversaries, or housewarmings, and the total value exceeds Rs.50,000, you might have to pay tax on the excess amount.

4. Inheritance and Wills: Gifts received through someone's will or inheritance are tax-free.

5. Gifts in Anticipation of Death: Gifts given by someone who expects to pass away soon are also tax-free.

6. Gifts from Certain Organizations: Gifts from specific organizations like local authorities, charities, universities, hospitals, and some others are not subject to tax.

7. Certain Property Transactions: Some property transfers, as defined under section 47 of the tax code, are not considered taxable gifts.

Taxable Gifts:

Apart from the exceptions mentioned earlier, some gifts are taxable when received by the recipient. These include:

Money Gifts: This can be in the form of cash, checks, or electronic transfers. If an individual receives more than Rs. 50,000 in total as gifts in a year, the entire amount is taxable as "income from other sources." Importantly, it's

not about the individual gift's value but the total gifts received in the year. 

Example: Mr. Rajiv got Rs. 1,15,000 from his friend in Delhi and Rs. 25,000 from his friend in Ranchi during the 2022-23 financial year. Since these gifts are neither from relatives nor related to his marriage, and the total exceeds Rs. 50,000, the entire Rs. 1,35,000 is taxable as "Income from other sources" for Mr. Rajiv.

Gift from relatives 

A gift received from a specified relative is exempt from income tax in the hands of the receiver. Thus, recipients of gifts are fully exempt from income tax without any monetary limit. 

Specified relative for the purpose of exempt gift means 

(i) spouse of the receiver; 

(ii) brother or sister of the receiver; 

(iii) brother or sister of the spouse of the receiver; 

(iv) brother or sister of either of the parents of the receiver; 

(v) any lineal ascendant or descendant of the receiver; 

(vi) any lineal ascendant or descendant of the spouse of the receiver; (vii) spouse of any of the persons referred to above.

Gift of Movable Property: 

When someone receives movable property (like shares, jewelry, art, or bullion) as a gift, the following rules apply:

1. No Consideration: If the value of this property on the date of receiving it is more than Rs. 50,000, it's considered income for the recipient in that year.

2. Inadequate Consideration: If the difference between the property's fair market value and what was paid for it is more than Rs. 50,000, that difference is considered income for the recipient in that year.

It is important to note that this applies only when the property is a capital asset for the recipient, not something used in their business. Also, like other gifts, it's the total value of gifts received during the year that matters for taxation, not the individual gift values.

Tax on Gifts of Movable Property: 

When you receive movable property (like shares, jewelry, art, or bullion) as a gift:

1. No Payment: If the total value of these gifts on the day you receive them is more than Ôé╣50,000, that extra amount is considered your income for the year.

2. Not Enough Payment: If the difference between the property's real value and what you paid for it is more than Ôé╣50,000, that extra amount is also counted as your income for the year.

Remember, this applies only when the property you received is something you would typically keep for a long time (a capital asset), not something used for your business. And it is based on the total value of all the gifts you got in the year, not each gift individually.

Example: Mr. Rohit bought a car for Ôé╣1,52,000, and the car's fair market value is Ôé╣2,52,000 in the year 2022-23. How is this car purchase taxed?

Answer: The car doesn't fall under the category of prescribed movable property. So, there won't be any tax applied to the purchase of the car.

Tax on Immovable Property (Land/Building): 

When an individual acquires land or a building, two scenarios can apply:

1. Property Received for Free: If you get the property without paying for it, and the stamp duty value (a value set by authorities for stamp duty) is more than Rs. 50,000, then the whole stamp duty value is taxable. The Rs. 50,000 limit applies to each property you receive.

2. Property Bought Cheaply: If you buy property for less than its stamp duty value, and the difference between the stamp duty value and the actual cost is more than Rs. 50,000 or 10% of the cost, whichever is higher, the extra stamp duty value is taxable. When you later sell this property, your cost for tax calculation will be based on the value defined in section 56(2)(x)(b).

Now, there's a question about which stamp duty value to use if the agreement date and the property registration date are different. There are two scenarios:

- Scenario 1: If you paid token money on or before the agreement date using methods like cheques, bank drafts, or electronic systems (like IMPS, UPI, etc.), the stamp duty value on the agreement date is used for tax calculation.

- Scenario 2: If you didn't pay token money in the prescribed way by the agreement date, the stamp duty value on the property registration date is used for tax calculation.

In all cases, the tax on immovable property is determined for each acquisition separately.

Example: Suppose the stamp duty value of an asset is Rs. 12,00,000, and the actual price you paid is Rs. 9,50,000. The difference is Rs. 2,50,000, which is more than Rs. 95,000 (the higher of Rs. 50,000 and 10% of Rs. 9,50,000). So, this extra Rs. 2,50,000 will be counted as income from other sources for the person who received the gift.

Example: Mr. Ajit received a flat as a gift from his father-in-law. The stamp duty value of the flat is Rs. 15,84,000. Does this mean the entire value of the gifted property is taxed?

Answer: No, in this case, the flat is a gift from a relative (father-in-law), so the entire value of the gift is tax-exempt for Mr. Ajit. It doesn't matter that the stamp duty value is more than Rs. 50,000.

Tax on Gifts for NRIs: 

Non-resident Indians (NRIs) need to pay taxes on gifts received in India, or if the gift is connected to India in some way. These gifts are treated as income from other sources for NRIs.

Gift from a Resident: If a resident gives a gift to an NRI, they must deduct 30% of the gift's value as tax, but only if the gift is worth more than Ôé╣50,000. However, when a resident gives a gift to another resident, there's no need to deduct tax.

Example: Amit sends Rs. 58,000 to his NRI brother for his birthday and another Rs. 65,000 to a NRI friend as a Holi gift. Does the NRI have to pay tax in India? Does Amit have to deduct tax?

- Amit’s brother is a specified relative, so his NRI brother is exempt from tax.

- Nainish doesn't have to deduct tax in this case.

- However, Amit’s NRI friend must pay tax in India because the gift's value exceeds Rs. 50,000, and it's not exempt. Amit has to deduct 30% tax in this situation.

 

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