Tax Implication of receiving Gifts

We know that gifts received from relatives are tax-exempt. But what is not widely known, at all, is that gifts received even from non-relatives can also be completely exempt from income tax. Here is the complete run-down.

It is very common for people to receive gifts from friends and relatives. In some cases, gifts are also received from NRls. Let us consider the latest provisions of the Income Tax Act, 1961 regarding gifts, and analyse how individuals can achieve complete exemption from income tax in respect of the gifts during the current financial year.

Gifts are Taxable Only in the Case of Individuals and HUFs

Certain gifts are liable to income tax as “income from other sources”, Sec 56(2)(vi). However, this provision is applicable only for individuals and Hindu Undivided Families (HUFs). Thus, if gift is received by any Trust or AOP, then it is not liable to income tax as “income from other sources”.

The provision of taxation of gifts became applicable in respect of gifts received on or after 1.9.2004 and before 1.4.2006 if the gift money exceeded Rs. 25,000. From 1 April 2006, this amount has been increased to Rs. 50,000 so that cash gifts and gifts by cheque or bank draft from non-relatives and from non-exempted categories can be fully exempt from income tax up to Rs. 50,000 in aggregate in one financial year.

Gifts from Relatives are Tax-Exempt

Importantly, the provisions of the aforesaid Section 56(2)(vi) applicable to the taxation of gifts in excess of Rs. 50,000 in a financial year in the aggregate are applicable for gifts received from non-relatives.

Thus, any gift from relatives of any amount during the financial year is completely exempt from tax. Therefore, it’s crucial to know the meaning of the expression ‘relative’ for this purpose. The expression “relative” means:

• Spouse of the individual;
• Brother or sister of the individual;
• Brother or sister of the spouse of the individual;
• Brother or sister of either of the parents of the individual;
• Any lineal ascendant or descendant of the individual;
• Any lineal ascendant or descendant of the spouse of the individual; and
• Spouse of the person referred to in clauses (ii) to (vi).

 For example, if Mr. A receives a gift of Rs. 200,000 in cash from his maternal uncle, that is, his mother’s brother, it would be exempt since the maternal uncle would be brother of the parent of the individual concerned and would come within clause (iv) of the aforesaid Explanation.

Hence, whenever you receive any gifts from relatives you must carefully apply the test to ascertain whether the person concerned falls within one of the seven categories of “relatives” or not. If a person who makes a gift does not fall within any of the above categories, then he would be considered as a non-relative and gifts from such people would be exempt only up to the extent of Rs. 50,000 in a financial year. It may be noted that since a Hindu Undivided Family can’t have relatives, any gifts received by it in excess of Rs. 50,000 in a year would be liable to full income tax.

Exemption for Marriage Gifts

One very happy feature of the provision of taxation of gifts is that any gift received from any person on the occasion of the marriage of the gift’s recipient would not be liable to income tax at all. There is no monetary limit attached to this exemption, which is provided by the proviso to Section 56(2)(vi). However, it is not made clear by this provision whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should suffice if the gift is given just on the occasion of the individual’s marriage, which means either on the day of the marriage itself, or a day or two before or after. Practical common sense view would prevail in such cases.

Tax-Exempt Gifts from Other Persons

Besides gifts received from a relative or on the occasion of an individual’s marriage, the following are the other gifts which are completely exempt from tax as provided in the proviso to Section 56(2)(vi) of the I.T. Act:

• Gift received under a Will or by way of inheritance;
• Gift in contemplation of death of the donor;
• Gift from any local authority;
• Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C); and
• Gift from any trust or institution, which is registered as a public charitable trust or institution under Section 12AA.

Thus, scholarships, stipends or charities received from a charitable institution would be completely exempt from income tax in the hands of the recipients without any limit provided the trust or institution giving the charity is registered under Section 12AA. Likewise, all gifts under a Will, and all amounts received on the death of a person as a part of the inheritance are fully exempt from income tax.

XPERT ADVICE

A proper knowledge and understanding of the provisions of Section 56(2) (vi) relating to gifts is very helpful in order to get full tax-exemption in respect of gifts received during a financial year.

Author- XPERT Consulting – Tax Consultants, E: contact@xpertconsulting.biz, www.xpertconsulting.biz)