Gifts

Taxability of Gifts in hands of Individuals

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Introduction

Indian Income-tax Act provides that all gifts above a limit are chargeable to tax in hands of the gift receiver, however, gifts received from relatives or gifts received on some special occasions are not chargeable to tax.

What is a gift?

From a taxation perspective, ‘Gifts’ has different meanings. If a person buys a property at a price which is less than its circle rate (stamp duty value), the benefits so gained by him is also considered as a gift under the Income-tax Act.

From taxation perspective, gift shall include:

  1. Gift of money – In cash or in Cheque
  2. Gift of immovable property
  3. Purchase of immovable property at a price lesser than its circle rate
  4. Gift of movable assets (shares, paintings, etc.)
  5. Purchase of a movable asset at a price lesser than its actual market value.

Tax free Gifts

In following situations, gifts received are not chargeable to tax:

  1. Gifts from ‘relatives’.
  2. Gifts received on the occasion of marriage. The benefit of exemption can only be taken by the bride or bridegroom.
  3. Sum of money received from non-relatives, if it does not exceed Rs. 50,000 in a financial year.
  4. Gift received under a will or by way of inheritance or in contemplation of death (not necessary from a relative only).
  5. Gift received from a local authority (Panchayat, Municipality, etc.)
  6. Gift received from a charitable trust or university or hospital (monetary assistance from a charitable trust or hospital for medical treatment).
  7. Appliances (air conditioners, laptops, etc.) or motor cars received as a gift.
  8. Rural agriculture land received as a gift.
  9. Gifts received by an employee from his employer and the aggregate value of the gift is less Rs. 5,000 during the financial year.

Taxable Gifts

Receipt of following gifts is chargeable to tax:

  1. Sum of money received from non-relatives, if it exceeds Rs. 50,000 in aggregate in a financial year.
  2. Gifts received by an employee from his employer and the aggregate value of the gift is Rs. 5,000 or more during the financial year.
  3. Land or building received without consideration
  4. Land or building purchased for inadequate consideration (circle rate of the property less 105% of the consideration paid is more than Rs. 50,000).
  5. Movable assets received without consideration or for inadequate consideration (market value of such assets less consideration paid is more than Rs. 50,000). Only the following movable assets received without consideration or for inadequate consideration are considered as a gift:
    • Jewellery and Bullion
    • Shares and securities
    • Archaeological collections
    • Paintings, drawings, sculptures, any work of art

Taxable limits for gifts

Should all gifts received during the year be aggregated to calculate the limit of Rs. 50,000 or this limit applies item-wise?

In these two categories [(a) sums of money and (b) movable items received without consideration or for inadequate consideration] the value of all gift shall be aggregated first and then checked against the limit of Rs. 50,000. However, in immovable property, there is no aggregation. The limit of Rs. 50,000 is applied property-wise.

For instance, if an individual receives money gifts of Rs. 60,000 and receives gifts of shares whose market value is Rs. 35,000. The gifts to be charged to tax shall be Rs. 60,000 only (money gift) and a gift of movable assets of Rs. 35,000 shall not be taxable as it does not exceed Rs. 50,000 limit.

Valuation of gifts

The fair market value of the immovable property or movable assets is the key factor to decide the value of the gift. If the price paid by the buyer to buy the property or movable asset is less than its fair market value, the difference between fair market value and consideration paid is regarded as the taxable value of gifts. Similarly, if these assets are gifted without any consideration, the entire fair market value is charged to tax. The fair market value of these assets is determined as per given below criterion.

Immovable Property

The fair market value of immovable property is deemed to be the circle rate announced by the state revenue ministry. Circle rate is a minimum price commonly known as Stamp Duty rate determined by the Stamp authority (Area-wise) for calculation of stamp charges to be paid by the buyer of the property.

If an individual or HUF declares that he has bought an immovable property (land or building) at a price which is lesser than the circle rate, the difference between the circle rate and the price paid is deemed to be the value of the gift.

If the result of the above working is negative, the value of gift shall be nil. In other words, if the price paid to acquire an immovable property is more than or equal to the circle rate, the taxable value of gift shall be nil. However, if the circle rate is more than the price paid by the buyer, the differential amount shall be taxable only if such circle rate is more than 105% of the price paid and Rs. 50,000. [Refer example below]

For instance, if an individual buys a flat from his friend for Rs. 9,00,000, the value of the benefit derived by such individual due to the difference in the circle rate and the price paid shall be taxable as per the following.

Listed Securities

The fair market value of listed security can be determined easily and accurately as these securities are traded in real time at national or regional stock exchanges. In the case of listed shares or securities, the fair market value is deemed to be price at which these securities are traded at the stock exchange.

If these listed shares or securities are received under a transaction not carried through a stock exchange, the fair market value shall be the lowest price of such shares and securities quoted on any recognized stock exchange (NSE or BSE or NASDAQ, etc.) on the date of transaction.

If the purchase price of such share or security falls short of the price at which it is traded at the stock exchange on the date of gift/purchase, such difference shall be taxable as a gift in the hands of the buyer/donee (if the value of a gift is more than Rs. 50,000). [Note: Donee is a person who receives a gift]

Unlisted equity shares

The assistance of a merchant banker shall be required to determine the fair market value of unlisted equity shares. As per the Income-tax Act, the fair market value of an unlisted share shall be determined on the basis of its book value. The book value of an unlisted share is based on the book value of assets and liabilities appearing in the balance sheet of the company. It is calculated as follows:

(Assets minus liabilities) * Paid-up value of a share / Total paid-up capital

Thus, if the price paid to acquire an unlisted equity share is less than its book value, the difference is deemed as the taxable value of the gift.

In case of unlisted shares, the taxpayer shall also have an option to get the value of such shares determined by a merchant banker as per Discounted Free Cash Flow Method.

Other assets

The fair market value of other assets (i.e., gold, bullion, paintings, etc.) shall be deemed to be the price at which these assets were bought from the registered dealer (a shopkeeper registered under GST). If these assets were bought from an unregistered dealer, the fair market value of these assets would be deemed to be the price it can fetch if sold in the open market. If the purchase price is short of the fair market value of such assets, the difference shall be taxable as a gift (if the value of the gift is more than Rs. 50,000). Similarly, if these other assets are received as a gift from a non-relative and the fair market value thereof exceeds Rs. 50,000, it shall be taxable as a gift in the hands of donee.

For instance: Mr A buys a painting for Rs. 40,000, whereas it’s market value is 65,000. The difference being Rs. 25,000 (Rs. 65,000 less Rs. 40,000) shall be deemed as a gift. However, it shall not be taxable as the difference between these two figures does not exceed Rs. 50,000. If Mr A buys the painting from a registered seller against a genuine invoice, the fair market value shall be deemed to be the price at which it is bought (Rs. 40,000) even if it is worth Rs. 65.000. If Mr A receives the painting for free as a gift, Rs. 65,000 shall be taxable in his hands as gift.

Meaning of Relative

‘Relative’ of an individual shall include his following relationships:

HusbandWife
Son or DaughterStepchild or Adopted child
Daughter-in-LawSon-in-Law
Father or MotherFather or Mother-In-Law
Step-father/motherHalf-brother/Sister
Brother or Sister
Brother-in-Law and his wifeSister-in-law and her husband
Grandfather or GrandmotherSpouse’s Grandfather or Grandmother
Grandson and his wifeGranddaughter and her husband
Great Grandson and his wifeGreat Grandson and his wife
Great Grandfather and GrandmotherSpouse’s Great Grandfather and Great Grandmother
Father’s Brother (and his wife)Father’s Sister (and her husband)
Mother’s Brother (and his wife)Mother’s Brother (and his wife)

Following persons are not deemed as ‘relatives’ for the purpose of receiving tax free gifts:

  1. Step-brother/sister
  2. Brother’s Son/Daughter
  3. Sister’s Son/Daughter
  4. Husband’s Brother’s Son/Daughter
  5. Husband’s Sister’s Son/Daughter
  6. Wife’s Brother’s Son/Daughter
  7. Wife’s Sister’s Son/Daughter
  8. Cousins

Frequently Asked Questions

Q: Can I accept gift in cash?

Gifts can be accepted in any mode including. However, the gift receiver should not accept a gift of more than Rs. 2 lakhs in cash as the Income-tax Act completely prohibits the cash transactions if the transaction value exceeds Rs. 2 lakhs. If cash transaction of above Rs. 2 lakhs is made then this result in a penalty on the gift receiver which shall be equal to the amount of gift received in cash.

For instance, if son accepts cash gift of Rs. 5 lakhs from his father, the son shall be liable to pay penalty for Rs. 5 lakhs because the transaction value exceeding Rs. 2 lakhs.

Q: Whether gifts received on birthday is chargeable to tax?

Gifts received on the occasion of birthday from non-relatives are chargeable to income-tax. However, if gifts received from non-relatives are in the form of monetary gifts (i.e., cash, cheques, gift cards, etc.) or moveable assets (i.e., shares, Jewellery, paintings, etc.) it shall be chargeable to income-tax. Thus, any gift received from relative or received in the form of the non-monetary gift shall be exempt from tax.

For instance, if Mr A gets a gift of a laptop from his friends on his birthday, the value of such laptop shall not be taxable in his hands as the laptop is neither a monetary gift nor a movable asset.

Q: Whether gifts received from employer chargeable to tax?

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’.

Q:  Is it required to disclose exempt gifts in Income tax return?

Tax-free gifts are not required to be disclosed in Income-tax return. However, it is advisable that the gifts which are specifically exempt from the tax should be disclosed in Schedule EI of the Income-tax return.

Q: How to disclosed taxable gifts in Income tax returns? The gifts shall be disclosed as taxable income in the ITR Form in Schedule Salary or Schedule OS (Other Sources), depending upon the nature of the gift.

‘Residential Status’ of an Individual

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