Tax on Gifts in India

Article explains Income Tax Treatment of Immovable Property Received as Gift Without Consideration or for Inadequate Consideration, Any property other than immovable property received Without consideration of For Inadequate Consideration, Gifts from Friends and Unrelated Persons, Gift from Relatives, Gifts Received at Wedding, Gift Received As Inheritance, Money Received in Contemplation of Death, Gift Received from Local Authority or Charitable Trust and Gifts Received at the time of termination of employment.

Brief History of Gift Tax in India:

In platitude, taxes on income are levied either on its accrual or receipt. Conversely, with the objective of taxing incomes which go non – taxable, the Indian tax law have evolved the concept of ‘Notional Income’. Notional Income is a fictional taxable income wherein the law shoulders certain kinds of incomes to have accrued to the assesse. Similarly, the legislation in India uses the concept of Notional income to tax Gifts in India. The Gift Tax Act was introduced in the year 1958 and subsequently amended and repealed in the year 1987 and 1998 respectively. Till 1^st October, 1998, all gifts (including gifts to relatives), barring few exceptions, were chargeable to Gift Tax in the hands of the Donor under Gift Tax Act. The Gifts were taxed at a flat rate of nearly 30% then with a basic exemption limit of Rs.30,000/-. Levy stopped for gifts made on or after 1^st October, 1998 and since then, the gifts were not only used for wealth and income distribution amongst family members / HUFs, but also for conversion of money. In order to evolve with the concept of Notional income, the then concept of ‘Donee’ based income tax on gifts was and have been introduced for curbing the said practice through Finance Act (No. 2)in the year 2004, effective from 1^st April, 2005 (for AY 2005-06).Consequently, Section 2 (24) which defines ‘income’ was amended by inserting clause (xiii) to include gifts received as income of a person and Section 56 (2) was amended for defining the scope and granting certain exemptions.

Taxability of Gifts – Headed under “Income from Other Sources”:

Indian income tax law which is governed by the Income-tax Act, 1961 (IT Act or the IT Act, 1961) and Rules framed thereunder imposes tax on income of a person under various heads. Fifth one of which is ‘Income from Other Sources’ provided under Section 56 of the IT Act. Further, Section 56 (2) defines incomes chargeable under the said head and computation of tax thereon. The Finance Act, 2009, inserted sub – clause (vii) under Section 56 (2) in the IT Act with a view to check avoidance of tax on transfer of monies and assets which are generally referred to as gift under the mutual parlance which was effective from 1^st October, 2009.Now, Section 56 (2) (vii) is recently amended (sort of repealed) through the Finance Act, 2017 which mentions that in clause (vii) of Section 56 (2), after the figures, letters and words “1^st day of October, 2009”, the words, figures and letters “but before the 1^st day of April, 2017 shall be inserted”and a new clause (x) is added therein.

Previously, the clause (vii) did not include any person other than individuals and HUFs. In order to avoid and confine tax evasion measures, the new clause (x) is been added and are said to mean as ‘anti – abuse provisions’. Through this amendment, provisions of clause (vii) and (viii) are merged in clause (x) and are made applicable to transfers from “ANY PERSON OR PERSONS”.  It now means that the receipt of cash or any property (other than shares also) becomes taxable also in hands of companies, firms and other persons subject to the conditions as discussed hereunder:               

A. Gift of Money [Section 56 (2) (x) (a)]:

Where any person receives in a previous year, from any person or persons on or after 1^st April, 2017, the aggregate value of which exceeds Rs. 50,000/- (Rupees Fifty Thousand Only), then the whole of the aggregate value of such sum is chargeable under the head “Income from other sources”.

Exceptions: This clause shall not apply in following cases:

1. Any sum of money or any property received from any relative on any occasion is not taxable. For the purposes of this clause, “relative” means (i) spouse of the individual; (ii) brother or sister of the individual; (iii) brother or sister of the spouse of the individual; (iv) brother or sister of either of the parents of the individual; (v)  any lineal ascendant or descendant of the individual; (vi) any lineal ascendant or descendant of the spouse of the individual; (vii) spouse of the person referred to in clauses (ii) to (vi) of Section 56 (2) of the IT Act. In the case of HUF, relative includes any member of the HUF.

2. Any sum of money or any property received from any person on the occasion of the marriage of the individual is not taxable;

3. Any sum of money or any property received under a will or by way of inheritance is not taxable is not taxable;

4. Any sum of money or any property received in contemplation of death of the payer is not taxable is not taxable;

5. Any sum of money or any property received from local authority as defined in Explanation to clause (20) of Section 10 of the IT Act is not taxable;

6. Any sum of money or any property received any fund, foundation, university, other educational institution, hospital, medical institution, any trust or any institution referred to in Section 10(23C)is not taxable;

7. Any sum of money or any property received from or by any trust or institution registered under Section 12AA of the IT Act is not taxable;[Here, as a replacement from earlier wordings, “from or by” any trust or institution is additionally modified to give a more practical view and understanding.]

8. Any sum of money or any property received by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub – clause (iv) or sub – clause (v) or sub – clause (via) of Section 10 (23C) of the IT Actis not taxable;[This is a newly added exemption to the above list]

9. Any sum of money or any property not regarded as transfer under certain clauses of Section 47 is not taxable;

10. Any sum of money or any property from an individual by a trust created or established solely for the benefit of relative of the individual is not taxable;

11. Any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto

Here, it can be perceived that government has kept the above referred trusts and organization out of purview of such taxation over income from other sources to maintain the non – taxability of donated money and properties.

B. Immovable Property Received as Gift [Section 56 (2)(x)(b)]:

a) Without Consideration:

Where any person receives, in any previous year, from any person or persons any immovable property without consideration and the stamp duty value of which exceeds fifty thousand rupees then in such case, the stamp duty value of such property will be taxable in the hands of receiver.

b) For Inadequate Consideration:

Where any person receives, in any previous year, from any person or persons any immovable property for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts:

(i) the amount of fifty thousand rupees; and

(ii) the amount equal to five per cent of the consideration

The excess differential amount will be taxable in the hands of receiver.

C. Any property other than immovable property [Section 56 (2)(x) (c):

a) Without consideration:

Where any person receives, in any previous year, from any person or persons any property other than immovable property without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property will be taxable in the hands of receiver.

b) For Inadequate Consideration:

Where any person receives, in any previous year, from any person or persons any property other than immovable property for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration.

The excess differential amount will be taxable in the hands of receiver.

The basis of valuation of shares is determined in the following manner:

1. Quoted shares and securities :

If such securities are transacted through Recognized Stock Exchange (RSE) then the basis for determination of FMV would be the transaction value recorded in RSE. However, if such securities are transacted through a medium other the RSE then the basis for determination of FMV would be the lowest price quoted on any RSE on the valuation date.

2. Unquoted shares and securities:

In case of unquoted securities, the basis of determination of FMV would be as per the formula as prescribed therein. The same is to be done through a report obtained from a Category I – Merchant Banker or a fellow member of the Institute of Chartered Accountants of India who is not appointed by the company as an auditor under Section 44AB of the IT Act, 1961.

3. Taxation of Share Premium in excess of FMV as income from other Sources:

Sub-clause (viib) was added to Section 56(2) by the Finance Act, 2012 saying where a Company, not being a Company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income-tax under the head “Income from other sources“.

Provided that this clause shall not apply where the consideration for issue of shares is received,

(i) by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund or

(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under-reported the income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year.

Explanation for the purposes of this clause:

1. the fair market value of the shares shall be the value

(i) as may be determined in accordance with such method as may be prescribed; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,

whichever is higher;

2. “specified fund” means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);

3. “trust” means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;

4. “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;

Conclusion: Since 2009, individuals and HUFs have been subject to tax with respect to acquisition or receipt of any asset below FMV. Further, in 2010, unlisted companies (not being a company in which the public are substantially interested) and partnerships (including Limited Liability Partnerships (“LLPs”) were also brought within the scope of this provision and accordingly, subject to taxation on the shortfall in case of acquisition of shares below FMV. The new amendment expanded the scope to cover all persons and acquisition/receipt of almost all types of assets (and not just shares), with an exception only in limited cases such as marriage, etc., which are already currently excluded in case of individuals/HUF. Concern is regarding applicability of the foregoing provisions to legitimate transactions. Provisions are referred as an anti-abuse measure, as acknowledged by the government itself in several instances, however, there are several legitimate transactions without any element of abuse which could get covered within the scope of such provisions. However, to conclude, it can be said that all the amendments proposed to this section are on a constructive note with concrete and unambiguous understanding in order to curb the misuse which was previously alleged.

(Republished with Amendments)