Summary: The Income Tax Act, 2025 has brought an important clarification to the tax treatment of gifts received from relatives by expanding and expressly defining who qualifies as a “relative.” Gifts received from relatives remain fully exempt from tax irrespective of the amount, whereas gifts exceeding ₹50,000 from non-relatives become taxable. The key change is the explicit inclusion of both maternal and paternal lineal ascendants and descendants, removing ambiguity that previously existed regarding gifts from maternal grandparents and other maternal relatives. The law continues to cover spouses, siblings, siblings of spouses, siblings of either parent, in-laws, lineal ascendants and descendants, and their spouses. A new provision also clarifies that any member of a Hindu Undivided Family (HUF) is a relative of the HUF. However, cousins, nephews, and nieces are not included within the statutory definition of relative, meaning gifts from them may be taxable. Taxpayers should verify relationships carefully, maintain documentation, and route gifts through banking channels.
Arjuna (Fictional Character): Krishna, gifting money among family members is a deep Indian tradition. The new Income Tax Act 2025 has changed the definition of “relative.” Why does this matter to a taxpayer?
Krishna (Fictional Character): Arjuna, any gift received from a “relative” is completely exempt from tax regardless of the amount. But if the same gift comes from someone not legally defined as a relative, any amount above Rs. 50,000 in a year becomes fully taxable in the hands of the taxpayer. So, the definition of relative directly determines the tax treatment of every family gift.
Arjuna (Fictional Character): Krishna, what is the most important change in the new definition of relative under the new Act?
Krishna (Fictional Character): Arjuna, the important change is the addition of the words maternal as well as paternal to the definition of lineal ascendant. Under the old Act Section 2(41), the definition simply said lineal ascendant or descendant without specifying whether maternal or paternal relatives were included. This created practical disputes tax officers would sometimes question whether gifts received from a maternal grandfather or maternal grandmother were exempt. The new Act 2025 under Section 2(94) has now expressly settled this by saying lineal ascendant maternal as well as paternal. For example, if a taxpayer’s Nana gifts Rs. 5 lakhs, it is now clearly and unambiguously tax-free and now there is no room for any dispute or questioning by the tax department.
Arjuna (Fictional Character): Krishna, for gift tax purposes the old law had a wider definition. What does the new law say and what has changed there?
Krishna (Fictional Character): Arjuna, the wider definition for gifts is largely retained in the new Act covering spouse, siblings, siblings of spouse, siblings of either parent such as Chacha, Bhua, Mama and Mausi, all lineal ascendants and descendants, in-laws, and spouses of all these relatives. Here too, the same important clarification of maternal as well as paternal has been added for lineal ascendants and descendants. Additionally, a new clause has been introduced specifically for Hindu Undivided Families it states that for an HUF, any member thereof is a relative of that HUF.
Arjuna (Fictional Character): Krishna, who is not covered? Whose gift can become taxable?
Krishna (Fictional Character): Arjuna, this is the most critical point. Cousins whether on the father’s or mother’s side are not relatives under the law. A gift from a cousin above Rs. 50,000 is fully taxable. Similarly, nephews and nieces are not lineal descendants of the taxpayer, so gifts received from them can also attract tax.
A gift received from an uncle such as Chacha or Mama is completely tax-free because uncle is the brother of a parent and is expressly covered in the definition. But a gift received from a nephew is taxable because nephew is the son of a brother or sister and does not fall anywhere in the legal definition of relative. So the same family, but opposite directions uncle to taxpayer is exempt, nephew to taxpayer is taxable.
Arjuna (Fictional Character): Krishna, what should taxpayers learn from this change?
Krishna (Fictional Character): Arjuna, the new Act has brought a very meaningful improvement by expressly including maternal relatives on equal footing with paternal relatives, a long-standing ambiguity has been removed. A taxpayer must always verify the relationship before treating any gift as exempt, maintain a simple written gift deed, receive gifts through banking channels, and report them correctly in the income tax return. Consulting a chartered accountant before accepting a large gift is always advisable. Gifts are given with love, but the Income Tax department sees them through the lens of law. A taxpayer must know relatives not just by heart, but also by law.
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