Gifts are taxable under the Income Tax Act, unless they fall under the category of exemption. Hence, gifts should be duly disclosed in the income tax return.
Earlier gifts were given only on important occasions. Now gifts are used as a tool for income-tax planning. There are several events when we receive gifts from our family members or friends. Many people believe that the gifts received out of love and affection are exempt from tax and don’t disclose the same in the income tax return (ITR). However, this isn’t the correct trend.
Gifts are taxable under the Income Tax Act, unless they fall under the category of exemption. Hence, gifts should be duly disclosed in ITR and taxes should be paid on them if they aren’t exempt in the hands of receiver. The non-disclosure of gifts may attract penalty which ranges from 50% to 200% of tax payable on income sought to be evaded.
The taxability of gifts can be divided into two categories, i.e., gifts received from employer and gifts received from others.
Gifts Received from Employer
There are instances when employers provide a gift to the employee on ceremonial occasion or to boost their morale or when they perform excellently. An employee is liable to be assessed for gifts received from the employer only if the value of such gift is Rs 5,000 or more. Gifts below Rs 5,000 in aggregate during the financial year are exempt from tax. These gifts are taxable as perquisites under the head ‘Income from Salary’.
Gifts Received from Others
Gifts received from any person, other than an employer, are dealt with as per provisions of Section 56 of the Income-Tax Act. Such gifts are taxable under the head ‘Income from Other Sources’ if they don’t fall in the exempt categories. The income tax law classifies gifts into three categories, i.e., Gifts in the form of Money, gifts in the form of Immovable Property or gifts in the form of movable property.
These gifts are exempt from tax if they are received from specified relatives or on specified occasions. Some of the occasions wherein the gifts are exempt from tax are mentioned below:
1. Gifts received by an individual from specified close relatives (list given below)
2. Gifts received on occasion of marriage of taxpayer
3. Gifts under a Will or by inheritance.
4. Gifts in contemplation of death of the donor.
5. Gifts from a registered trust or institution
6. Distribution of assets at the time of total or partial partition of HUF.
List of Relatives:
The following persons are not deemed as ‘relatives’ for the purpose of receiving tax-free gifts:
Gifts in the form of cash or cheque, which don’t fall in exempt category, would be chargeable to tax if the value of such gifts exceeds Rs 50,000 in aggregate. The whole of the aggregate amount is chargeable to tax and not the amount in excess of Rs 50,000.
Gifts in the form of immovable property, i.e., land or building, shall be charged to tax if the net benefit accruing to the recipient is Rs 50,000 or more. If immovable property is received without consideration and the stamp duty value of the property exceeds Rs 50,000, the stamp duty value of such property will be chargeable to tax. If immovable property is received for a consideration but the actual cost of acquisition (sales consideration) is less than the stamp duty value of the property by an amount exceeding Rs 50,000, then the difference between stamp duty value and consideration is chargeable to tax.
The last category is gift of specified movable property, inter-alia, shares, securities, jewellery, archaeological collections, drawings, paintings, sculptures and any work of art, or bullion. Similar to immovable properties, if the taxpayer receives gift of such movable property or buys them at a price lesser than its fair market value, the value of benefits so obtained shall be taxable in the hands of the recipient.
If the aggregate fair market value of movable properties received without consideration during the previous year exceeds Rs. 50,000, the whole of the aggregate fair market value of movable properties will be chargeable to tax. If the movable property is purchased for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, then the difference between aggregate fair market value and the consideration is chargeable to tax.
It is worthwhile to mention that gift of a movable property which is not a specified property shall not be covered under this provision, i.e., gift of motor car by a friend, valued Rs 5,00,000, is not taxable as the same is not covered under the definition of movable property under the Income Tax Act.
Disclosure of Gifts in the Income-Tax Returns
The gifts shall be disclosed as taxable income in the ITR under the Schedule Salary or Schedule OS, depending upon the nature of the gift.
It is advisable that the gifts which are specifically exempt from the tax should be disclosed in Schedule EI of the ITR.
(By CA Naveen Wadhwa, DGM, and CA Tarun Kumar, Assistant Manager, Taxmann.com)