Taxability of gifts and its exemption ruless is an important topic in Income Tax.
The term “Gift” is very well known to all.
In general terms, the gift means a presentation to any nearest and dearest one on the eve of any occasion. It may be either in cash or in kind.
However, in a certain situation, a gift can increase your tax burden.
The whole monetary value of the gift can be treated as your income from other source and chargeable to tax.
Let us discuss it properly.
Contents
1. Types of Gift
For income tax purpose, the term gift means money or property receive without consideration or inadequate consideration.
In simple terms, there are two types of gifts:
- Money, and
- Property.
Again, the property can be divided in two parts:
- Movable, and
- Immovable.
The term money does not mean only cash. It may be cheque or draft etc.
Further, the terms “movable property” for this purpose means:
- Shares & Securities;
- Jewellary;
- Archeological Collection;
- Drawings;
- Paintings;
- Sculpture;
- Any work of art; and
- Bullion
On the other hand, the term “immovable property” means land or building or both.
2. Taxability of Money Receipt
If any sum of money received without consideration from one or more persons during the previous year exceeds Rs. 50000, the whole of the aggregate amount is chargeable to tax.
Suppose, you have received Rs. 21000 from Mr. Avishek, Rs. 20000 from Mr. Vinod and Rs. 10000 from Mr. Krishna in the previous year. The total amount is Rs. 51000.
The whole of the aggregate amount is chargeable to tax because the aggregate amount is more than Rs. 50000.
You can’t say that all the single transaction is less than Rs. 50000 because in this case the single transaction is not considered.
The total amount i.e. the aggregate amount of all transaction is considered.
3. Taxability of Movable Property
The concept of taxability of movable property can be explained in two parts:
- Movable Property received without consideration; and
- Movable property received for an inadequate consideration.
Let us discuss it one by one.
a) Movable Property received without consideration.
If the aggregate Fair Market Value (FMV) of the movable properties received during the previous year exceeds Rs. 50000, the aggregate FMV of all movable properties will be chargeable to tax.
b) Movable Property received for an inadequate consideration.
In this case, if the difference between the aggregate FMV of movable properties and the total consideration paid for such movable properties exceeds Rs. 50000 then such difference amount will be chargeable to tax.
In case of movable property the FMV shall be determined as under:
- If the movable properties purchased from a registered dealer (i.e. GST registered), the invoice price of such property is treated as FMV.
- In case of purchase from an unregistered dealer, the price it would fetch if sold in the open market on the valuation date shall be treated as FMV. In other words, the FMV is the price at which the property is normally sold in the market.
| Illustration:
1) Mr. Avishek purchases jewellery from a registered dealer. The invoice price is Rs. 350000. The same jewellery is available from other shops at Rs. 450000. In this case, the invoice price is taken as FMV of such jewellery. The jewellery is purchased at the FMV. So, nothing is taxable. 2) What happens if the same jewellery was purchased from an unregistered dealer? In this case, the FMV is the price at which the jewellery is normally sold in the market i.e. Rs. 450000. However, the amount of consideration paid is Rs. 350000. The difference between the FMV and the consideration paid is Rs. 100000 which is more than Rs. 50000. Therefore Rs. 100000 will be chargeable to tax. 3) In the case of Number 2, if the FMV is Rs. 395000, what will be the result? As per number 2, the jewellery was purchased from an unregistered dealer. In this case, the difference between the FMV and the amount of consideration is taken into account. The FMV is Rs. 395000 and the amount of paid consideration is Rs. 350000. Therefore the difference is Rs. 45000 which is less than Rs. 50000. So, nothing can be chargeable to tax in the hands of Mr. Avishek. |
4. Taxability of Immovable Property
The concept of taxability of immovable property can be explained in two parts:
- Movable Property received without consideration; and
- Movable property received for an inadequate consideration.
The details of it are given here:
a) Immovable property received without consideration
If the stamp duty value of such immovable property exceeds Rs. 50000, the stamp duty value is chargeable to tax.
| Mr. Avishek receives a gift of residential property from his friend. The stamp duty value of this property is Rs. 890000.
It can be seen that the stamp duty value is more than Rs. 50000. Hence, Rs. 890000 is chargeable to tax. |
b) Immovable property received for an inadequate amount.
In this case, the following two conditions must be considered:
- The stamp duty value of such immovable property exceeds 105% of the amount of consideration; and
- The difference between the stamp duty value and the amount of consideration is more than Rs. 50000.
If both the above conditions are satisfied then the difference between the stamp duty value and the amount of consideration shall be chargeable to tax.
| Illustration:
1) Mr. Avishek purchases an immovable property from his friend for Rs. 5000000. Stamp duty value is Rs. 5150000. Determine the taxability. Answer: It is the case of movable property received for an inadequate consideration. So, in order to ascertain the taxability the following two conditions will be considered: i) Stamp duty value exceeds 105% of the consideration amount, and ii) The difference between the stamp duty value and the consideration exceeds Rs. 50000. Here, the stamp duty value is Rs. 5150000, and the amount of consideration is Rs. 5000000. Now, 105% of the amount of consideration is Rs. 5250000. Hence, the stamp duty value is less than 105% of the amount of consideration. Hence, one of the conditions is not satisfied. Therefore, nothing is chargeable to tax. Q. 2. What will happen if the stamp duty value is Rs. 5275000? In this case, both the conditions are satisfied i.e. stamp duty value is more than 105% of the consideration and the difference between the stamp duty value and the amount of consideration exceeds Rs. 50000. In this case the difference between the stamp duty value and the consideration amount i.e. Rs. 275000 (Rs. 5275000 minus Rs. 5000000) is chargeable to tax. |
5. Exemption
It is the most interesting area of this rule and most waiting part also. Everybody wants to know about exemptions.
The provisions of section 56(2)(x) shall not apply if any gifts (money/movable property/immovable property) received:
- From any relative
- On the occasion of the marriage of the individual.
- By way of inheritance or through a will.
- In contemplation of death of the payer or donor.
- From any local authority.
- From any fund/foundation/University/other educational institution/ hospital/other medical institution or any trust/institution referred to in section 10(23C).
- From a charitable institution registered u/s 12A/12AA.
- By any fund/foundation/University/other educational institution/ hospital/other medical institution referred to in section 10(23C).
- By way of the transaction not regarded as transfer u/s 47.
- From an individual by a trust created or established solely for the benefit of the relative of the individual.
In general, the first three points are very important for normal taxpayers. These are very common to all.
6. Meaning of Relative
In the case of an individual, the term “relative” means:
a) Spouse.
b) Brother or Sister.
c) Brother or Sister of the Spouse.
d) Brother or Sister of either of the parents of the individual.
e) Any lineal ascendant or descendant of the individual.
f) Any lineal ascendant or descendant of the spouse of the individual.
g) Spouse of the person referred to in points (b) to (f).
In case of HUF, any member of the HUF is a relative.
Here I want to inform you about two special cases related to gift tax. I hope that will provide you some extra value.
a) Gyanchand M Bardia vs. ITO (2018)
In this case, the assessee claimed that the gift received from HUF will be exempted from tax. However, the term relative does not include “HUF” as the relative.
Any member can be a relative of a HUF but not vice-versa.
Therefore, if a member receives any gift from HUF, that will be chargeable to tax.
b) Pendurthi Chandrasekhar vs. DCIT (2018)
In this case, the assessee could not explain why his relative gave him Rs. 73 Lakh as a gift without any consideration.
According to AO, there was no valid occasion so that gift would be chargeable to tax.
However, according to the High Court, any occasion is not necessary in this case.
Any gift from relative is already exempt. So, there is no further requirement for any occasion.
Finally, the decision was given in favor of assessee.
For further details of these case laws, you can go to taxmann.com.
8. Avoid tax evasions by way of gift.
Don’t use these rules for tax evasions.
Remember, there is no limit on the value of gifts received from relatives.
But some tax planning is also needed.
If you say my brother gave me Rs. 50 lakh in the way of gift, that amount is tax-free.
But there is a little problem.
The AO may ask your brother about the sources of that heavy amount.
If there is a valid source then no problem.
If not, then?
So, be careful at the time of tax planning.
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