We all love to give and receive gifts of all kinds. With the holiday season quickly approaching we takes a minute to look at the ‘cost’ of receiving and giving gifts and the effect it could have on your tax returns.
On October 1, 2009, the Central Board of Direct Taxes (CBDT) put into effect that people receiving gifts, in cash or kind, will have to pay tax, if the value exceeds Rs 50,000. In the past, the income tax was levied ONLY on cash gifts of this amount. The basic meaning of this rule is that if you receive a gift that is in value over Rs 50,000, you will “need to pay income tax due on the aggregate value of the gift and disclose the taxable value of such property in the return of income for assessment year 2010-11 and subsequent years”.
The reason for the changes was to address loopholes in Section 56 in which only cash gifts from Non-Relatives were taxed if they exceeded more than Rs 50,000. Under Section 56 you could receive gifts such as (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; or (ix) bullion;
We will start with your nearest and dearest, your family. Under the CBDT ruling you can receive any amount of gift from your relatives without paying income tax. However, there are some points we need to discuss in how the “gifts” can be received, i.e. what the Income Tax Department deems as a relative.
The following categories are tax exempt:
a. Your spouse;
b. Your brothers and sisters and their spouses;
c. Your spouse’s brothers and sisters and their spouses;
d. Brother and sister of your parents and their spouses;
e. Any lineal ascendant (parents, grandparents, children, grandchildren) or descendants (children, grandchildren)and their spouses;
f. Any lineal ascendant (parents, grandparents, children, grandchildren) or descendant of your spouse (children, grandchildren)and their spouses
g. In case of a Hindu undivided family, any member thereof;
As with any rule there are some exceptions. In regards to taxable gifts the following list falls under tax-exempt for people that are Non-Relatives.
The following categories are tax exempt:
i. Gifts received on the occasion of marriage of an individual even from non relatives are not an income
ii. under a Will or by way of inheritance;
iii. in contemplation of death of payer;
iv. from local authority as defined in Explanation to section 10(20);
v. educational or medical institution or fund etc. referred to u/s. 10(23C);
vi. trust or institution registered u/s. 12AA.
vii. 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 (vi) or sub-clause (via) of clause (23C) of section 10; or
viii. by way of transaction not regarded as transfer under clause (i) or [clause (iv) or clause (v) or] clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of section 47; or
ix. from an individual by a trust created or established solely for the benefit of relative of the individual.
To reiterate what is taxable and not, you should keep in mind the above two categories of Relatives and Non-Relatives. If you do not fit into either one, you will be taxed. Items such as automobiles, fancy gadgets, shares, jewellery, property or anything else valued over Rs 50,000 received as a gift from a Non-Relative, will be a tax liability and will be added to your total income and the corresponding Income Tax will be deducted. In case a property has been sold at a nominal rate as a gift, the receiver will have to pay taxes on the difference between state government notified rate and the purchase price.
All these types of gifts are considered to be “income from other sources” by the CBDT and will be taxable.
As you are gifting and receiving this holiday season, keep in mind the Central Board of Direct Taxes rulings on Taxable Gifts. Have your gifts be ones that you can continue to enjoy through the New Year without having to pay for during the tax season. And most importantly…
Have a joyous, safe and tax free Holiday Season!
Source: InvestmentYogi is one of the leading personal finance websites in India
(Republished With Amendments)