Taxability of gifts received by an individual

INTRODUCTION:-

In this article, we will emphasis on the applicability of income tax laws on the gifts (movable or immovable) received by an individual from any person.

DESCRIPTION:-

Income tax laws bifurcates gifts received by an individual in three broad categories namely Gift of money (cash/ cheque etc), Gift of movable property and Gift of Immovable property.

Further, an individual can receive the above mentioned gifts from anybody like from any of his/ her relatives or friends and at any time / occasion.

The income tax laws, however provide relief to the individual when the above 3 categories of gifts are received:-

• from any relative or
• from anybody on the occasion of an individual’s marriage or
• under a will or by way of inheritance or
• in contemplation of death of the payer or donor or
• from any local authority
• from any fund, foundation, University, other educational institution, hospital, other medical institution
• from a trust registered under section 12AA.

The term relative has been defined in the tax law as under:-

1. spouse of the individual
2. brother or sister of the individual
3. brother or sister of spouse of individual
4. brother or sister of either of parent of individual
5. any lineal ascendant or descendant of individual
6. any lineal ascendant or descendant of spouse of individual
7. spouse of person referred in 2 to 6 

The term property has also been defined in the tax laws:-

• immovable property being land or building or both
• shares and securities
• jewellery
• archaeological collections
• drawings, paintings, sculptures
• any art work or bullion

Gift of Money and/ or movable property :-

When an individual receives money as gift, whether in the form of cash or cheque or electronic transfer or from any other kind of source, it will be taxable only and only if the aggregate value of such money receipt exceeds 50,000 during the financial year.

Further, when an individual receives movable property as gift, it will be taxable only and only if the aggregate fair market value exceeds 50000 during the financial year (without consideration)

If any movable property is received for inadequate consideration, then it will be taxable if the consideration is less than the  aggregate fair market value by Rs 50000.

Now, both these gifts of money and movable property have an individual limit of 50000 each, i.e in aggregate one lakh.

Few Examples:-

A) Mr Aakash received 15000, 18000 and 15000 from his three friends as gift during the year. Now, this whole gift of cash received will be tax free as the aggregate value of gift is 48000 which is less than 50000.

B) Now, what if the aggregate of cash gifts amounts to 53000. Now, the whole cash gift will be taxable as income from other source in Aakash’s hand.

C) Aaksh received the following gifts on his marriage:-

• cash gift of Rs 120000 from his friends
• car gift from his spouse’s friends
• jewellery received from his cousin brother
• shares of Maruti received from his Father

Now, the receipt of above mentioned gifts would be tax free in Aakash’s hand as all these are recived on the ocassion of his marriage, no matter if they are received from his friends or his spouse’s friends or his cousin brother.

Anything received on marriage from anybody would be tax free. But, this does not mean that you try to say that after two years of your marriage that the gift you received is received for marriage occasion. 

D) Devdas received the following gifts on his marriage anniversary:-

• Gold ring from his wife’s father (father in law)
• Cash of Rs 75000 from his friends
• Shares of HDFC as gift from his Father
• Car gift from his cousin brother (Chacha’s son)
• Cash received from his Mama of Rs 100000

Now, the taxability of above gifts is to be seen on individual basis.

• Gold ring received from Father in law is tax free as it is received from a relative
• Cash received from friends of Rs 75000 would be fully taxable as it is received on occasion of marriage anniversary
• Shares received from Father is tax free as these are received from a relative
• Now, this fourth gift is important. Gift from cousin brother or sister would be taxable because they are not your relative as per income tax law. However, as the gift received is car which is not included in definition of property, therefore car gift would be tax free.
• Gift received from Mama would be tax free as Mama is covered in the definition of relative as per Income tax act

E) Kavita cleared her 12^th exams on top in her region. Therefore, the school gave her cash award of Rs 50000. Also the local municipal corporation felicitated her with cash award of 25000. Also one uncle in her locality gave her Rs 10000 for her appreciation.

Now, awards received from educational institution and a local authority which is covered in the list of gift received from specified persons will be tax free. However, money received from uncle would be taxable, but as it is less than 50000, it will be also tax free.

F) Vijay received shares of SBI from his friend Ravi for Rs 120000. The fair market value (FMV) of the shares is Rs 150000.

Also, he received shares of Yes Bank for Rs 150000 having FMV of Rs 180000 from his friend Mahesh.

Now, if we see that he paid aggregate of Rs 270000 for acquiring the shares. But, the correct FMV was Rs 330000. Therefore, the difference of Rs 60000 would be taxable in his hands as income from other sources as the FMV of such shares exceeds the consideration by 50000.

Gift of Immovable property :-

If an individual receives any immovable property without paying a single penny (without consideration) or for inadequate consideration the Stamp duty value (SDV) of which exceeds the consideration paid by higher of Rs 50000 or 5% of consideration, then the SDV in case of without consideration and amount by which such SDV exceeds consideration in case of inadequate consideration would be treated as income from other sources in hands of recipient.

FEW EXAMPLES :-

A) Anil receives flat as gift from his father in law having SDV of Rs 36 lakh.

Now, this gift of flat will be exempted in Anil’s hands as flat is received from a relative.

B) Anil buys flat having SDV of Rs 70 lakh for Rs 55 lakh from Ravi (property dealer)

Now, here we will see whether the difference between consideration and SDV exceeds higher of 50000 or 5% of consideration paid i.e. 55 lakh.

5% of 55 lakh comes to 275000. Now, the difference between SDV and consideration exceeds 275000 and therefore the whole difference of Rs 15 lakh would be treated as income of Anil.

C) Anil buys a flat having SDV of Rs 50 lakh for Rs 62 lakh.

Now, since consideration paid is more than SDV, nothing will be taxed in Anil’s hands.

CONCLUSION:-

Whenever you receive anything without consideration or for inadequate consideration, just check from whom it is received and when it is received and the value of such gift.

SOURCE:- Income tax Act, Section 56(2) (x)

Author is a Practicing Chartered Accountant in Chandigarh in own proprietorship Vaibhav Mago & Associates and can be reached on mail [email protected] and on mobile 9877542172.