Gift tax – A guide

Introduction 

India is a land of celebrations and traditions. And any celebration is incomplete without gifts. But did you know the gifts you receive are taxable? Yes, the income tax laws in India include any gifts received beyond Rs. 50,000. The provisions of gift tax are part of the Income Tax Act, 1961.

Given below are a few details of the taxability of gifts in India.

What is the history of gift tax and the current gift tax rates?

Gift tax is not a new feature of the Indian tax laws. It was first introduced in 1958 and gifts were taxed at the flat rate of 30%. This tax was originally introduced to curb tax evasion. Taxpayers would give large assets in the form of gifts to their families or relatives to evade tax liability. As an attempt to put a stop to such tax evasion, the government introduced the gift tax. 

However, it was abolished in the year 1998 which made all the gifts tax-free. But this did not last long and the gift tax was reintroduced in a renewed form in the year 2004. This tax law was further amended in the year 2017 accordingly, all the gifts are taxed under the head ‘Income from Other Sources’ at the applicable slab rates.

What are the provisions related to gift tax?

The provisions of gift tax are mentioned under section 56(2)(x). Any movable or immovable asset or property when gifted to any person is taxable in the hands of the receiver or the donor of the gift depending on the provisions of this section. The detailed provisions of this section and the applicable taxpayer in each case are mentioned below.

1. When a gift is received in the form of money over Rs. 50,000, the entire amount will be taxable in the hands of the receiver.
2. When the gift is received in the form of immovable property without consideration and the stamp duty value of such property is more than Rs. 50,000, the taxable amount will be equal to the stamp duty value of the property.
3. When the immovable property is given as a gift for inadequate consideration and the stamp duty value of the property is above Rs. 50,000, the taxable amount will be equal to the stamp duty value less the consideration paid (If it is above Rs. 50,000). If the resultant amount is less than Rs, 50,000, the taxable amount will be NIL. 
4. Similarly, if the gift is in the form of any movable property (like shares, jewelry, etc.) and is transferred without any consideration and the fair market value of the gift is above Rs. 50,000, the taxable amount will be equal to the fair value of such gift. 
5. In the above case, if the gift is given for inadequate consideration and the fair market value is more than Rs. 50,000, the taxable amount will be equal to the fair market value less the consideration paid (If it is above Rs. 50,000). Again, if the resultant amount is less than Rs, 50,000, the taxable amount will be NIL.

What are the exemptions from the gift tax?

The gift tax was introduced as there were many cases o tax evasion in the name of gifts. Therefore to remove any ambiguity and to provide a definite structure to the taxation on gifts, section 56(2)(x) was introduced. However, the department also recognizes certain genuine cases of gifts that may not be in the nature of tax evasion and therefore are categorized under the exemptions from the gift tax. Given below are the details of the transactions where gifts received are not taxable in the hands of the receiver.

1. Gifts received from specified relatives are exempted from any taxation irrespective of the value of the gifts. The specified relatives for this purpose include the following,
   1. Parents of self or spouse 
   2. Spouse
   3. Grandparents or great grandparents of self or spouse 
   4. Siblings of self or spouse
   5. Siblings of parents of self or spouse 
   6. Any direct descendants of self or spouse
   7. Spouses of any of the relatives mentioned above
2. Gifts that are received by a person at the time of their marriage.
3. Any asset movable or immovable received by a person through the benefits of any will or inheritance is not taxable under the gift law.
4. Gifts given by employers to the dependents of a deceased employee in the form of gratuity, bonus, or money will be exempt from taxation.
5. Gifts received in the form of money or otherwise as a reward for any academic excellence or recognition of any specific skills or good deeds are also exempt from taxation. 
6. Any asset or property received from any local authority as per section 10(20) of the Income Tax Act, 1961 is also exempt from taxation. 
7. Any property received from a medical institution or hospitals, foundation, fund, any educational institution like a university, etc., or a trust or institution as per section 10(23) of the Income Tax Act, 1961 will be exempt under the gift tax laws.
8. Also, a property received from any religious or charitable trust that is registered under section 12A, 12AA, or 12AB of the Income Tax Act, 1961 is also not taxable under section 56(2)(x).
9. Any asset or property received by any member of HUF on account of any distribution of capital assets due to a partial or complete partition of the HUF.

Conclusion

Gift tax has been part of the Indian taxation system for decades but there is still a majority of taxpayers who have little or no idea of the regulations regarding the same. Gifts have been a popular tax evasion tool and therefore through the gift tax, the government has aimed to curb such cases as well as generate greater transparency to various assets of the taxpayers. 

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