Given that gifts are a means of expressing affection, it is important to know the tax implications of such gifts and diligently comply with disclosure requirements while filing ITR.
By Kumarmanglam Vijay
Laxmi and her family are excited to host her NRI cousin Anil who has come to visit them this festive season with his family. Anil gifts a fine piece of jewellery to her and an expensive watch to her husband. Laxmi and her husband are also contemplating reciprocating with equally expensive gifts to Anil and his wife. While they accept and/or give such gifts, it is important for them to understand the tax considerations.
The Gift Tax Act, enacted in 1958, was abolished in 1998. However, certain provisions deeming certain gifts as taxable income were introduced in September 2004 by amending section 56 of the Income tax Act, 1961 (IT Act) that applies to income from other sources. The scope of such provisions has been widened over the years. From April 2017, any sum of money or property received without any consideration, or for inadequate consideration, vis-a-vis the fair market value of the property could be taxed as income from other sources in the hands of the individual. However, where the aggregate value of the money received as gift, or the difference between consideration paid and fair market value of the property (other than immovable property), does not exceed Rs. 50,000, such receipts are not subject to tax.
In the case of cash gifts, the limit of Rs. 50,000 applies to the aggregate value of the cash gifts received from all sources during a financial year. To clarify further, if the total amount received during a financial year exceeds Rs. 50,000, the entire amount becomes taxable in the hands of an individual.
In the case of movable properties (shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, bullion), the aggregate fair market value of such properties received during the financial year from all sources without any consideration, or for inadequate consideration, is to be considered.
The deemed benefit to an individual on receipt or purchase of immovable property for a consideration that is less than the stamp duty value /circle rate (STV) of the property is taxable in the hands of the buyer of the said property. Such tax is levied only where the difference between the consideration paid and STV exceeds the following amounts:
- Rs 50,000; or
- 5% of the considerations
Tax is levied in such a case on the excess of STV over the consideration discharged by the buyer at the applicable tax rates. For arriving at deemed benefit on receipt of immovable property without any consideration, or for inadequate consideration, the above analysis has to be undertaken for each property received.
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Certain exceptions that allow a set of transactions to remain outside the purview of the foregoing deeming provisions are mentioned below:
1. Gifts received from relatives: Relatives are defined to mean the individual’s spouse/brother/sister, brother/sister of either parents of the individual, any lineal ascendant or descendant of the individual or spouse of the persons exempted herein. Please note that son / daughter of uncle or aunt do not qualify as relatives for the purpose of this exemption.
2. Gifts received by an individual on the occasion of his or her marriage – Please note that gifts received by any person on the occasion of marriage of another individual are not exempted.
3. Money or property received under a will or inheritance or in contemplation of death of the payer or donor is also exempted.
In the situation discussed above, Laxmi’s cousin Anil may not be regarded as a relative, and if the aggregate value of the gifts received by her from all the sources during a financial year exceeds Rs. 50,000, she is required to include such deemed benefit in her income and discharge tax on the amount. The same rule applies to the gift given by Laxmi to Anil while he is residing in India: if the aggregate value of the gifts received by him during the financial year exceeds Rs. 50,000, he would need to include the fair value of such gifts in his income taxable in India and discharge tax on the amount.
Given that gifts are a means of expressing affection for select persons, it is important to know the tax implications of such gifts and diligently comply with disclosure requirements while filing one’s return of income to avoid gifts from becoming a source of distress.
(The author is Partner in J Sagar Associates, Advocates and Solicitors and views expressed are personal.)