The Income Tax Act deals with the taxation of such gifts which are in the form of cash, movable property or immovable property.
Receiving gifts makes everyone happy. To make one’s near and dear ones happy, therefore, gifting has become a part of Diwali celebrations. Not only to relatives and neighbours, but gifts are given also by employers to their employees, business houses to prominent clients, etc, which has become a norm during the festival of light.
“Diwali is one of the most celebrated festivals of India. The festival is celebrated not only in India but also in various other parts of the world. During this festival, people share their happiness by way of exchanging gifts. However, there are chances that such gifts may unknowingly attract income tax provisions. Thus, one must take into consideration the tax consequences arising from such gifts to thoroughly enjoy the festivities,” says CA Dr. Suresh Surana, Founder, RSM India.
Thus, receiving too many gifts may also attract taxes.
Dr. Surana discusses the relevant provisions of the Income Tax Act, 1961 (“the IT Act”) applicable to the taxation of gifts.
A gift may be in the form of cash, property or any other form. However, the IT Act deals with the taxation of such gifts which are in the form of cash, movable property or immovable property.
Taxability of Cash Gifts
Cash gifts are exempt from tax where the amount of gift is upto Rs 50,000. However, where the amount of cash gift is greater than Rs 50,000, then the entire amount of such gift would become taxable in the hands of the recipient of the gift.
Such threshold of Rs 50,000 would be determined by taking the aggregate value of gifts into consideration as opposed to the individual value basis. For instance, suppose a person has received gifts from 4 different individuals amounting to Rs 20,000 each. In such a case, though the individual gift amount does not exceed Rs 50,000, the entire amount of gift would be subject to taxation in the hands of the recipient since the aggregate amount has already exceeded Rs 50,000.
Cap on Cash Gifts
It is also pertinent to note the applicability of section 269ST under the IT Act which would restrict the donee to receive any cash gift amounting to Rs 2 lakh or more otherwise than by way of account payee cheque / bank draft or electronic clearing system through a bank account or through any other prescribed electronic mode. Any violation of the said provision may attract penalty and hence, the same needs to be taken into consideration while receiving any gift.
Taxation of Property as Gifts
Immovable property constitutes land, building or both whereas movable property would constitute shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, or bullion and transfer of any other property. Further, taxation of gifts in the form of movable or immovable property depends on whether such gifts are transferred without consideration or for inadequate consideration.
In case the movable or immovable property is gifted without any consideration, the full value of the property would be brought under the ambit of taxation, provided the same exceeds the threshold of Rs. 50,000.
Whereas in case of property for which part consideration has been derived or which is gifted for an inadequate consideration i.e. actual consideration is less than the full value by an amount that exceeds Rs 50,000, then the differential amount between the full value and the actual consideration shall be subjected to tax under the head ‘Income from other sources’. However, in case of an immovable property transferred for an inadequate consideration, such gift would be subject to taxation only when an additional condition of the stamp duly value exceeding the consideration by 5 per cent or more is fulfilled.
In case of gift of movable property, the full value of consideration shall be the Fair Market Value of such movable property whereas in case of gift of immovable property, such full value shall be the stamp duty value which would be derived in accordance with the stamp duty reckoner rates.
Taxability of Gift from Employer
Gift from employer as gift voucher or cash till Rs 5,000 would be tax exempt in the hands of the employees. In case the amount exceeds Rs 5,000, then the entire amount shall be taxable as perquisites in the hands of the employees.
Exchanging gifts is an integral part of the Diwali occasion. It is pertinent to note that where the cash gift is upto an amount of Rs 50,000, such gift would not be chargeable to tax. Moreover, gift from specified close relatives would also be tax-exempt in the hands of the recipient.
When No Tax is Levied on Gifts
There are certain prescribed situations where no tax would be levied on such gifts irrespective of the threshold. Such prescribed situations would include gifts received from any relatives, on the occasion of marriage, under a Will or by way of Inheritance, in contemplation of death of the payer of such gift, from any prescribed Local Authority, Trust, University etc.
In accordance with the explanation to Section 56(2)(vii), the expression “relative” would mean:
(i) in case of an individual—
(A) spouse of the individual;
(B) brother or sister of the individual;
(C) brother or sister of the spouse of the individual;
(D) brother or sister of either of the parents of the individual;
(E) any lineal ascendant or descendant of the individual;
(F) any lineal ascendant or descendant of the spouse of the individual;
(G) spouse of the person referred to in items (B) to (F); and
(ii) in case of a Hindu undivided family, any member thereof.
Diwali gifts given by any relative would not be subject to tax irrespective of amount exceeding the threshold. In other cases, the gift would be taxable under the head “Income from Other Sources”. The recipient of the gift would be required to disclose the same at the time of filing the return of income.