By Homi Mistry, Mousami Nagarsenkar and Hiral Tanna
In a country like India, where families are close knit and there are a number of festivals, gifts are also abundant. Now, the question that arises is whether gifting can be considered to be taxable either in the hands of the person giving the gift or receiving it? As per income tax laws, giving a gift is not taxable for the donor. However, receiving gifts can attract tax. If the total value of gifts received during the tax year exceeds Rs 50,000, the entire value of gifts received (subject to the basic exemption limit and specified exclusions) would be taxable. For instance, if you get gifts of Rs 5,000 each from 11 friends on your house warming, the total amount exceeds Rs 50,000 and hence the entire Rs 55,000 would be taxable. The tax on gifts needs to be paid by way of advance tax / self-assessment tax before the tax return is filed by the person receiving the gift.
We could receive gifts not only in the form of cash, but also in the form of movable property and at times even immovable properties like a house. Certain moveable assets including jewellery, drawings, paintings, bullion, sculptures, shares and securities received as gifts are subject to tax. In such cases, if the fair market value of the movable property exceeds Rs 50,000, then the entire amount is to be included in the taxable income. To determine the taxable value of an immovable property received as a gift, you need to check the stamp duty value. If the stamp duty value exceeds Rs 50,000, then the amount chargeable to income tax = Stamp Duty Value – Consideration paid by the recipient, if any.
It is pertinent to note here, that if a property, whether moveable or immovable, is purchased at less than its fair market value / stamp duty value, the difference will be regarded as a gift to the purchaser and taxed in his hands if the difference exceeds Rs 50,000.
Do all gifts exceeding Rs 50,000 attract tax? No, the following exceptions have been carved out to treat certain gifts as exempt:
# Gifts received from relatives (definition of relative includes spouse, siblings of self/spouse, parents/grandparents of self/ spouse, etc)
# Gifts received on the occasion of marriage of the individual
# Gifts received under a will / inheritance / on contemplation of death of the payer
# Gifts received from any local authority / fund or foundation as specified in section 10(23C) / trust / institution registered under section 12AA of the domestic tax laws
Hence, you may gift without any limits to your near and dear relatives without worrying about tax. However, a word of caution here. Any income arising to the spouse or minor children or daughters-in-law on the gift given will be clubbed in the hands of the person giving the gift. For example, if you gift a sum of Rs 75 lakh to your wife and she uses this money to purchase a house and receives rent for the house, though the gift of Rs 75 lakh will not be subject to tax either in your or your wife’s hands, the rent that she receives will be regarded as your income and be added to your taxable income and taxed in accordance with the Income Tax Act. It will not once again be taxed in her hands. The clubbing provisions are applicable only to the spouse, minor children and daughters-in-law; gifts to other relatives do not attract clubbing provisions.
In India, gifts have been used widely as a tax planning measure to reduce taxes. Tax authorities, therefore, often probe gifts to establish their authenticity and the legitimacy of the sources of funds out of which gifts have been given. Hence, it would be prudent to maintain documents such as a gift deed, evidencing the fact that the gift has been genuinely received and that the person giving the gift has sufficient sources of funds to justify the gift. Further, in respect of an immovable property, stamp duty also needs to be paid in accordance with the state laws. In some states like Maharashtra, there is a concession in the stamp duty rates if the property is gifted to family members.
(Homi Mistry is Partner, Mousami Nagarsenkar–Director and Hiral Tanna–Manager at Deloitte Haskins & Sells LLP)