• Jul
  • 14
  • 2010

Law on Taxability of Gifts under the Income Tax Provisions

Generally, gifts received are not regarded as Income chargeable to Tax. However, by virtue of section 2(24)(xiii) r.w.s. 56(2)(v)  after 1-9-2004, any sum of money exceeding Rs. 25,000 (Rs. 50,000 in respect of gifts received in or after 1.4.2006), received without consideration by an individual or an HUF from any person is chargeable to tax as Income under the head Other Sources, subject to following exceptions: [(a) Receipts from certain relatives; as defined in the section]. (Refer Chart) [(b) Receipts on occasion of marriage of the individual.] [(c) Receipts under a will or inheritance.] [(d) Receipts in contemplation of death of the payer.]

Sec. 56(2)(v) has been amended by the Taxation Laws (Amendment) Act, 2006 so as to exempt also the receipts from (i) local authority, (ii) institutions exempt u/s. 10(23C); and (iii) trusts/institutions registered u/s. 12AA.

Sec. 56(2) has been further amended and w.e.f. 1-10-2009, the scope of gift is increased by adding immovable property or any property besides sum of money [S. 56(2)(vii)] excluding stock-in-trade, raw material, consumable stores or any other trading assets as under :

List of Property –

i) immovable property being land or building or both ;

ii) shares and securities ;

iii) jewellery ;

iv) archaeological collections ;

v) drawings ;

vi) paintings ;

vii) sculptures ;

viii) any work of art ;

Valuation of Gift in case of

(i) Immovable Property

(a) without consideration – if stamp duty value exceeds Rs. 50,000/-, stamp duty value

(b) for a consideration which is less than stamp duty value – Provision not applicable

(ii) Any other property:

(a) without consideration – fair market value exceeds Rs. 50,000/-, fair market value of the property

(b) for a consideration – fair market value less consideration exceeds Rs. 50,000/-, the fair value less consideration.

w.e.f 1-6-2010 following items added:-

1. Bullion

2. Receipt of shares of a closely-held company without consideration or inadequate consideration is taxable. S. 50(2) (viia)

A.  Provision not applicable in case of the following restructuring:

i.            Transfer of shares of Indian company by amalgamating foreign company to amalgamated foreign company
ii.            Transfer of shares of Indian company by de-merged foreign company to resulting foreign company
iii.            Transfer by shareholder of co-operative bank in a business reorganization of a co-operative bank.
iv.            Transfer by shareholder of shares of amalgamating company

B. Receipt of shares of a closely-held company by a firm (including LLP) or a closely- held company taxable if transfer is without consideration or for inadequate consideration.

C. Fair market value less consideration is taxable, subject to difference of more than Rs.50,000.

D. Amount taxed to be treated as cost of acquisition in the hands of recipient.

Relatives from whom Gift is permissible

List of Male Donors List of Female Donors
Father (Papa or Pitaji) Mother (Maa or Mummy)
Brother (Bhai) Sister (Bahin)
Son (Beta or Putra) Daughter (Beti or Putri)
Grand Son (Pota or Potra) Grand Daughter (Poti or Potri)
Husband (Pati) Wife (Patni)
Sister’s Husband (Jija) Brother’s Wife (Bhabhi)
Wife’s Brother (Sala) Wife’s Sister (Sali)
Husband’s Brother (Dewar) Husband’s Sister (Nanad)
Mother’s Brother (Mama) Mother’s Sister (Mausi)
Mother’s Sister Husband (Mausa) Wife’s brother’s wife (Sala Heli)
Father’s Brother (Chaha or Tau) Father’s Brother’s Wife (Chachi or Tai)
Father’s Sister’s Husband(Fufa) Father’s Sister (Bua)
Grand Father (Dada) Grand Mother (Dadi)
Great Grand Father (Pardada) Great Grand Mother (Pardadi)
Daughter’s Husband (Jawai) Son’s Wife (Bahu or Putra Vadhu)
Wife’s Father (Sasur) Wife’s Mother (Sas)
Husband’s Father (Sasur) Husband’s Mother (Sas)
Wife’s Grand Father (Dada Sasur) Husband’s Grand Mother (DadiSas)
Husband’s Grand Father (Dada Sasur) Wife’s Grand Mother (Dadi Sas)
Wife’s Great Grand Father(Bada Dada Sasur) Husband’s Great Grand Mother (Badi Dadi Sas)
Husband’s Great Grand Father(Bada Dada Sasur) Wife’s Great Grand Mother (Badi Dadi Sas)
Brother’s Wife(Bhabhi) Mother’s Brother’s Wife (Mami)
Husband’s Brother’s Wife(Devrani or Jithani)

Notes:

  1. Subject to clubbing provisions applicable for Gift received from Spouse and Parent-in-Law.
  2. The individual can receive gifts without attracting tax also from lineal ascendents and decendents of the individual/spouse of the individual other than those mentioned in the above chart.

Valuation rules for determining ‘fair market value of gifts’

Background:

The Finance (No. 2) Act, 2009 has inserted clause (vii) in section 56(2) of the Income-tax Act (‘the Act’) to tax an Individual or a Hindu Undivided Family (HUF) who is receiving any asset which is in the nature of shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art (specified assets) without consideration or for inadequate consideration i.e. consideration which is less than fair market value (FMV) by an amount exceeding Rs. 50,000. Further, the Finance Bill, 2010 proposes to insert a similar provision to tax receipt of shares of a closely-held company by a firm or another closely held company. If Bill is enacted and become part of the law, then, the rules notified will also apply to the valuation of shares covered by the proposed provisions.

Synopsis of the Rules

The rules 11U and 11UA prescribes the different methods for the purpose of valuation of specified assets.

The FMV of the specified asset needs to be determined on a date on which such specified assets are received by the assessee.

The determination of FMV, under this rule, will be only for the purpose of section 56 of the Act.

Notification No. 23/ 2010, which shall come into force from 1st October, 2009. Further, specified assets received from relative are not covered by the provisions of Section 56(2)(vii) of the Act.

Methods of Valuation

  1. 1. Valuation of Specified assets (other than shares & securities)
Description of the property Basis for determination of FMV
Specified assets other than shares and securities Estimated price which specified asset will fetch if sold in the open market on the valuation date.
In case if specified assets are received by the way of purchase on the valuation date from the Registered Dealer (means a dealer who is registered under Central Sales-tax Act, 1956 or General Sales-tax Law for time being in force in any state including value added tax laws). FMV is the Invoice Value of the asset.
In case if specified assets are received by any other mode and the value of the specified assets exceeds Rs. 50,000. The assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date.

A registered valuer is a person who is entitled to function as registered valuer for the purpose of the Wealth Tax Act.

  1. 2. Valuation of Shares & Securities
  • Valuation of Quoted Shares & Securities
Description of the property Basis for determination of FMV
If quoted shares and securities are received by way of transaction carried out through any Recognized Stock Exchange (RSE) Transaction value recorded in such RSE.
If quoted shares and securities are received by way of transaction carried out other than through any RSE. Lowest price quoted on any RSE on the valuation date.

If in case there is no trading on the valuation date, then, FMV will be lowest price on the date immediately preceding the valuation date when trading happened.

  • Valuation of Un-quoted Shares
Description of the property Basis for determination of FMV
Unquoted Equity Shares Value as per the balance sheet (including notes
thereto) on the valuation date in terms of the following
formula:

(A – L) x PV
—————
PE

Where,

A = Book value of assets in balance sheet
less

advance income-tax paid,
any amount which does
not represent the value of any asset, including debit
balance in profit & loss account

L = Book value of liabilities in balance sheet
less

(i) paid-up equity capital;
(ii) amount set aside for undeclared dividend;
(iii) reserves, other than towards depreciation;
(iv) credit balance in profit & loss account;
(v) amount of provision for tax, other than advance
income-tax paid in excess of tax payable
with reference to book profits (minimum alternate tax);
(vi) provision towards unascertained liabilities;
(vii) provision towards contingent liabilities.

PE = Total amount of paid-up equity share capital

PV = Paid-up value of such equity shares received

  • Valuation of Unquoted Shares other than equity shares
Description of the property Basis for determination of FMV
Unquoted shares and securities other than equity shares in a company which are not listed in any RSE Price it would fetch if sold in open market on the valuation date & the assessee is required.

To obtain a report from a Merchant Banker or a Chartered Accountants in support of the FMV


5 Responses to “Law on Taxability of Gifts under the Income Tax Provisions”

  1. James says:

    Title : Is it possible to receive a huge amount from my foreign friend in my SBI bank a/c for real estate investment?

    I am establishing partnership firm in India, it’s between me and my foreign friend who is Canadian citizen, we will deal in real estate in buying, selling, developing townships etc.
    In partnership firm, the taxes are 30% on the profit as we all know, remaining will be distributed among both of us.
    On the other hand, Because of trust factor and finding some investors for my foreign partner for their business we have reached to this level where my partner is even ready to transfer the amount in my personal bank account so no 30% taxes will be given in case if we buy property through my name using the money which w’d come in my personal account rather buying through firm name. We also know that foreigners can’t buy Property in India on their names so my partner is even ready if I buy property on my name. 
    So is it possible that i receive huge amount in my own SBI bank account so major properties can be buy using my name and rest in partnership firm name, at time of giving back the profit to my partner, i use my own bank account to transfer the funds to my partner so 30% taxes will be given only on those properties what w’d have been bought using firm name, 
    what documents can i show to the income tax department at time of receiving the huge amount from my partner and sending the profit money to my partner at the time of selling the properties?
    Can i show my partnership deed not only just for the prove of firm existence BUT also at the time of doing transaction from personal account, to prove we are genuine and doing these transactions for business purposes.
    Partnership deed has got all partnership clauses, also included my name, my partner name, Addresses and signature of both.
    Also, my real brother is NRI who is in Qatar (I am not NRI) who also has SBI NRI account, w’d it be ok to use his NRI account for receiving and sending money for my business transactions AND showing the same partnership deed which is on the stamp paper in case if i or my brother w’d be questioned, but problem is, NRI account belongs to my brother and partnership deed is between me and my foreign friend, Please suggest what to do?
    Looking forward to see reply, Thank you.

  2. Chandrahash Chaudhary says:

    if a husband wishes to give some money to his wife to buy a second hand car, can it be treated as a gift. The value car , say is about Rs.2.50 lacs and he want to give her about Rs.1.00 lakh to help her buy a second hand car in her name.
    The car will use for family purpose only and not for any commercial or professional use or purpose repeat not for any commercial or professional use.
    If yes, will this amount be taxable and in whose hand, husband or wife.

  3. arun says:

    Information is very good and useful.
    Can you make it “PRINTABLE MODE”.
    THIS WILL HELP US IN GETTING PRINT OF THE DIRECT MATERIAL.

  4. copy and paste in word file

  5. Sandeep Gala says:

    Can I download the details,if yes how?

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