India is a country of dynamic culture with many festivals celebrated throughout the year. Diwali is one such festival where gifts are exchanged out of love and affection. However, it is highly important to have an understanding on the taxation of gifts in India, as there could be tax implications for both the person giving the gift and the one receiving it.
As per the provisions of India Income Tax Act, following are the types of gifts that are taxable in the hands of the recipients:
- Monetary gifts: These can be in the form of cash/ cheque/ electronic mode. If the total value of money received by an individual during a financial year exceeds INR 50,000, the entire amount of money received by such individual will be considered as taxable.
- Immovable property: Land and or building may be received as a gift by an individual. In case the stamp duty value of this gifted property exceeds INR 50,000, this stamp duty value will be considered as taxable.
- Movable property: Specified movable gifts (e.g., jewellery, paintings, drawings, shares/securities, collections, etc) may also be received. Where the fair market value (FMV) of such gift exceeds INR 50,000, the FMV of the property will be taxable as income. The manner of determination of FMV for each of these moveable properties are specified in the tax laws – in case of jewellery, the price which such jewellery would fetch if sold in the open market, will be considered to be the FMV.
If any individual receives monetary gifts in aggregate of INR 50,000 (total of all gifts received), then the whole sum of money is taxable in the hands of the receiver. In other words, cash gift received up to INR 50,000 in the entire year is not taxable. However, if the amount received as gift is higher than INR 50,000, the entire gift becomes taxable. For example, if the amount of gift received from a friend is INR 51,000, the entire amount of INR 51,000 would be considered as taxable gift and would be required to be offered to tax as ‘Income from Other Sources’.
Following are some of the gifts which are not considered as taxable in the hands of the recipient and also do not have any tax implications for the person gifting them:
- Gift received from specified relatives are not taxable, regardless of amount. To remove any confusion regarding the classification of relatives, these relatives are defined as spouse, brothers/ sisters (and their spouses) of the individual/ individual’s spouse/ individual’s parents, lineal ascendants/ descendants (and their spouses) of the individual/ individual’s spouse.
- Gifts received by an individual from non-relatives on the occasion of his/ her own marriage are not taxable. It is important to note that gifts received by parents of the couple will be considered as taxable.
- Monetary gifts or any property received under a Will or by way of inheritance or in contemplation of death of the payer (who is ill and expects to die shortly of his illness) is not taxable
It is important to note that in some cases, the income generated from the gift may be taxable in the hands of person receiving it. For example, if an individual gifts INR 100,000 to his spouse, the same would not be added to the income of his spouse. However, if his spouse invests the same and earns interest, the interest would be added to the income of the individual giving the gift (subject to certain specified exceptions).
These clubbing provisions should be evaluated by the donor, if the donee is spouse, minor child or son’s wife. It is also commonly seen that parents deposit money in minor children’s bank accounts. While this money deposited by the parents would be considered as gift from relative and hence not taxable, however, for tax purposes, the interest earned from such bank deposits would be clubbed (subject to specified conditions) with the parent’s income, subject to the applicable exemption.
While the taxation of gifts provisions discussed above are also applicable to non-residents, there has been specific clarification from tax authorities on non-residents receiving gifts outside India from a person resident in India. Such gifts will also be considered as deemed to accrue or arise in India and hence taxable in India (subject to tax treaty exemptions). Hence for Indian non-residents only if the gift is received from another Indian non-resident and received outside India, the same will not be considered as taxable in India.
As can be seen, there may be multiple tax considerations based on the nature of the gift. Hence it is recommended to maintain sufficient records and documentation of the gifts given or received, to be able to respond to any future tax notices/ enquiries (if any). It is also recommended that the gifts received are disclosed (income as well as assets reporting schedules, as applicable) in the India income-tax returns, to ensure compliance.
(By Alok Agrawal, Partner with Deloitte India, with Vikas Birla, Senior Manager, and Alisha Chowhan, Deputy Manager with Deloitte Haskins and Sells LLP)