In India, gifting is a common gesture to show the love and care that we have for each other. Gifting is also used for transferring property and other assets to family members or relatives by way of inheritance. Do we know the tax implications of receiving gifts from relatives? The Gift Tax Act of 1958 was introduced and later got incorporated into the Income Tax Act of 1961 to ensure tax compliance. Let’s take a look at the taxation of gifts that are received from a relative.
Taxation of Gifts that are received from a Relative1
Section 56 (2) of the Income Tax Act, 1961 provides for the incomes chargeable under the head "Income from other sources including gifts received.. In this, ‘gift’ means any sum of money, immovable property, or moveable property received without consideration or with a reduced price. Property includes land and building, jewellery, sculpture, drawings, securities, works of art, archaeological collections, paintings, bullion, etc.
Gifts received are considered taxable or non-taxable based on certain rules mentioned under Section 56 (2) of the Income Tax Act, 1961.
Gifts received by individuals are tax-exempt under the following conditions:
- Gifts (monetary benefits, moveable or immovable property) received from relatives
- Gifts received on the occasion of the marriage of the individual
- Gifts received by way of inheritance or under the will
- Gifts received in contemplation of the death of the donor
That means a gift received from relatives is tax-exempt irrespective of the value of the gift. Here, ‘Relative’ refers to
- Spouse of the individual
- Brother or sister of the individual
- Brother or sister of the spouse of the individual
- Brother or sister of either of the parents of the individual
- Any lineal ascendant or descendent of the individual
- Any lineal ascendant or descendent of the spouse of the individual
- Spouse of the persons referred in (b) to (f) of Section 56 (2) of the Income Tax Act, 1961
- in case of a Hindu undivided family, any member thereof;
Other than the above-mentioned conditions, a gift received with a value of greater than INR 50,000 is subjected to income tax. While gifts received worth less than INR 50,000 are exempted from income tax. If the limit of INR 50,000 is crossed, the tax is levied on the entire amount of the gift in the hands of the recipient as per Section 56 (2) (x) of the Income Tax Act, 1961. Let’s understand the tax treatment of gifts received with the examples below.
Example 1
Let’s say, Amit is a tax-payer working in an MNC. He receives INR 2,00,000 from his brother-in-law as a gift on Diwali. Is this taxable for Amit?
No! as INR 2,00,000 is received as a gift from a relative (brother of the spouse), the gift received by Amit is tax-exempt.
Example 2
Let’s say Neeta is a tax-paying IT professional. She receives INR 30,000 as a birthday gift from her friend. Is this taxable in the hands of Neeta? No! it is not taxable in the hands of Neeta, as a gift worth less than INR 50,000 is exempted from income tax. Let’s say she had received INR 80,000 (more than the limit of INR 50,000). The entire gift amount of INR 80,000 would have been subjected to income tax.
It is important to consider the tax implications of every financial transaction to stay tax compliant and also to reduce the outgo of income tax to maximise your investment returns. While gifting a moveable or immovable property by way of inheritance is one way of securing your family or the next generation. The life insurance policy also plays a vital role in securing your family’s financial future during uncertain situations along with offering you tax benefits.
To reduce the tax outgo, there are various tax deduction provisions under Section 80C of the Income Tax Act of 1961. Buying a life insurance policy may provide you with the benefit of life cover along with tax deduction under Section 80C of the Income Tax Act, 19612. As a responsible citizen, it is important to comply with tax rules and regulations.
References:
1Tax Laws & Rules > Acts > Income-tax Act, 1961 (incometaxindia.gov.in)
2https://incometaxindia.gov.in/Tutorials/18.%20Tax%20treatment%20of%20gifts.pdf
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