GIFT TAX Rules: Find out who needs to pay tax on gifts received

This article talks about how gifts are taxed in India and who need not pay tax on gifts received.

Gifting has always been seen as a way for people to express love and affection. Yet, with the increased focus on taxation, the legislations have been penned so as to levy tax on gifts. The Act also specifies certain categories of transactions that are not covered under the ambit of taxation. Let us discuss here what kind of gifts is covered and their quantum to be taxed and who need not pay tax.

Section 122 transfer of property act defines Gift as transfer of certain existing moveable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee. Section 123 deals with transfer how effected. According to section 123, for the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor and attested by at least two witnesses. Section 124 says “A gift comprising both existing and future property is void as the latter”. The gift deed should therefore involve only existing property.

As per income tax law, as it stands today which was amended in 2017, gifts received by any person or HUF are taxed in the hands of the recipient under the head ‘Income from other sources’ at normal tax rates. If any sum of money is received on or after 01/10/2009 by an Individual or HUF without any consideration and the aggregate value of which exceeds Rs. 50,000 (i.e, monetary gift may be received in cash, cheque, draft, etc.) during the previous year, then the whole of the aggregate value of such sum is chargeable to tax as income from other sources in the hands of the recipient.  Also, if an immovable property has a stamp duty value (The stamp duty value is calculated on the property’s market value depending upon the locality where the property is situated), the fair value of the property is assessed. The value of immovable property in excess of Rs.50,000 or movable property such as shares of a company or jewelry or work of art etc. having a fair market value in excess of Rs 50,000 is received without consideration, the same is subject to tax in the hands of the recipient. Such income is taxable at applicable tax rates in the year of receipt. The legislations have been penned so as to levy tax even if gifts are provided by an employer to employees. Such gifts are taxable in the hands of the employees as salary income provided the aggregate value in a year is Rs 5,000 or more. However, the IT Act also specifies certain categories of transactions stated below which are not covered under the ambit of taxation and it is very important for a recipient of the gift to ensure whether or not the gift received by him is subject to tax.

In case of any individual or HUF, the tax will not be charged in respect of any sum of money received without any consideration, if the same is received from any relative; or by a HUF from its members; or on the occasion of the marriage of the individual; or under a will/ by way of inheritance; or in contemplation of death of the payer or donor as the case may be; or from a local authority as defined under section 10​ of the Income-tax Act, or from any fund, foundation, university, other educational institution, hospital or other medical institution, any trust or institution referred to in clause (23C) of section 10, or 12AA, (applicable if the money is received on or after 1st day of April 2017), or any transaction that is not treated as “transfer” under section 47 of the income tax act.

​​​For the purpose of Section 56 of income tax, the following persons would be considered as relative, who is not covered under the ambit of taxation.

(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 descendent of the individual;

(f) Any lineal ascendant or descendent of the spouse of the individual;

(g) Spouse of the persons referred to in (b) to (f)

Contents of the Gift Deed:

It is important that the gift deed should mention that the donor is the absolute owner of the property and transferring the gift property voluntarily and freely out of love and affection towards the donee, and there is no consideration of any other type involved in the transfer. The transfer shall be free of any fear, coercion, or threat. The gift deed should specify the detailed description of the gift property and rights of the donee to enjoy the property peacefully and sell or mortgage or lease the property. Though revocation clause may be added to gift deed on certain eventualities it is not advisable to put such clause so as to avoid any conflict in the future. The deed should be signed and attested by at least two witnesses mandatorily.

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