A cash gift from parents is exempt from tax but taxpayers are required to report it in their Income Tax Return as exempt income. However, many taxpayers are unsure as to how and where they can report such gifts in ITR. Further, there seems to be some confusion about the formalities one should complete to remain clear in the eyes of the Income Tax Department.

For instance, Amlan Rakshit, a taxpayer, recently wrote to FE Money, saying he is aware that any gift received from parents is tax-free but he asked how to report such gift as Exempt Income in ITR. Further, Amlan wanted to know the formalities he should complete to remain “clean” in the eyes of the law.

While it is important to declare any cash gift received from parents in ITR, the recipients of such gift should also execute a Gift Deed on Stamp Paper, if it involves a large amount. This Gift Deed will serve as proof in case there is any query from the tax department in the future, according to experts.

The following are some important points taxpayers should keep in mind to ensure the cash gift from parents doesn’t land them in tax trouble in the future:

Declare gift in ITR

“Gifts received from parents are exempt from tax.  However, it has to be declared in the Income tax return (ITR) as exempt income under Schedule Exempt Income (EI) in the ITR form,” says Sudhakar Sethuraman, Partner, Deloitte Touche Tohmatsu India LLP.

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“Receipts of any amount from the specified relatives (which includes Father and Mother) as a gift would not be chargeable to tax as per the provisions of Section 56(2)(x) of the ITA. While the current ITR schedules do not have any specific disclosure to report the gifts, which are not chargeable to tax, on a conservative basis, it is advisable to disclose the same under the ‘Schedule Exempt Income’ of the ITR,” adds Shruti K.P, Partner, INDUSLAW.

Which ITR Form should you choose?

Sudhakar Sethuraman says that Schedule EI is the place where exempt income has to be declared in the ITR form. This schedule is available in all ITR forms. You need to choose the correct ITR based on the applicable conditions.  For example, if you are a resident with just salary and interest income without overseas or domestic assets disclosure requirements then you can file in ITR 1. 

“The selection of the ITR form would primarily depend upon other sources of income as well (such as salaries, business income, etc.) that you may have during a particular financial year,” says Shruti.

Get a Gift Deed on Stamp Paper to remain clean

“Besides disclosing the exempt income in the ITR Form under Schedule EI, it is advisable to execute a gift deed on a stamp paper to be able to substantiate the same before the tax authorities if there is any query in the future. In addition, the tax authorities may want to understand the source of income of your father or mother,” says Sudhakar Sethuraman.

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Gifts from close relatives are also tax-free

Under section 56 (2)(x) of the Income Tax Act, gifts received from “specified” relatives are exempt from tax. These specified relatives include spouse, brother or sister and their spouses, brother or sister of either of the parents, any lineal ascendant or descendant such as Parents, Grandparents, Children, etc. and their spouse etc. (Read more details here)

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