Introduction: The evolution of the Income Tax Act, 1961, has seen the abolition and reintroduction of certain provisions. Among these is the Gift Tax Act, 1958, which met its end in 1998 but made a comeback in 2006. This article delves into the complexities of Gift Tax, its exemptions, and the implications for both givers and receivers.
We all know that under Direct Tax Act, one by one act is abolish and today only one act is remain, i.e. Income Tax Act, 1961. Wealth tax Act was abolish by Budget, publish on 28th February, 2016, by the than Finance Minister, Mr. Arun Jetly from assessment year 2016-17. It was replaced by the 2% surcharge on taxable income of over Rs 1 crore.
Gift Tax Act, 1958 which was abolished as per Section 75 of the Finance Act, 1998. Consequently, the Act ceased to have effect after 1th October 1998.
Due to misuse of the abolition of gift-tax in the form of widespread transfer of insincere gifts from non-relatives, Section A few years later, in 2004, Gift Tax was reintroduced in the Income Tax Act, 1961, under Section 56 and brought into effect from 1 April 2006 under Finance Act, 2004. Now, the gift tax shifted to a ‘donee based’ taxation system and gifts received became taxable in the hands of the recipient. Section 56(2)(v) of the Income Tax Act, 1961 was enacted.
On and from 1st April, 2006 any individual or Hindu Undivided Family received more than Rs. 50,000 as gift, it will be considered as income of recipient. If Mr. Atul, received a cheque of Rs. 60,000 as gift from his friend Mr. Shailesh, Rs. 60,000 will considered as income of Mr. Atul for that year. But the amount of cheque is of Rs. 50,000 nothing is to be added to the income of Mr. Atul. One thing keep in mind that amount up to Rs. 50,000 is exempt, it does not mean that out of Rs.60,000, Rs. 50,000 is exempt and Rs. 10,000 will considered as income. The moment it exceed Rs. 50,000 entire amount is considered as income of recipient.
If any person received gift from his relatives by natural love and affection, it will not be considered as income of recipient. As per section 56(2) of the act, relatives are to be considered as under.
- Father or Mother
- Spouse of an individual
- Brothers and sisters of an individual or spouse
- Brothers and sisters of parents of individual
- Lineal ascendant or descendant of individual or spouse
In the case of Hindu Undivided Family, any member thereof.
Mortis Causa shall not be considered as income. The relative has been defined in the explanation and to understand the same, the chart given is as under:
| List of Male Donors | List of Female Donors |
| Father | Mother |
| Brother | Sister |
| Son | Daughter |
| Grand Son | Grand Daughter |
| Husband | Wife |
| Sister’s Husband | Brother’s Wife |
| Wife’s Brother | Wife’s Sister |
| Husband’s Brother | Husband’s Sister |
| Mother’s Brother | Mother’s Sister |
| Mother’s Sister’s Husband | Wife’s brother’s Wife |
| Father’s Brother | Father’s Brother’s Wife |
| Father’s Sister’s Husband | Father’s Sister |
| Grand Father | Grand Mother |
| Daughter’s Husband | Son’s Wife |
| Spouse’s Father | Spouse’s Mother |
| Spouse’s Grand Father | Spouse’s Grand Mother |
| Mother’s Brother’s Wife | |
| Husband’s Brother’ Wife |
However, 1st proviso of section 56(2)(x) provides that provisions of section 56(2)(x) will not apply to any sum of money or property received:
- From any relative or
- On the occasion of marriage of individual or
- Under a WILL or by way of inheritance or
- In contemplation of death of the payer or donor as the case may be or
- From any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C) or
- From any local authority as defined in Explanation to section 10(20) or
- From or by any trust or institution registered u/s 12A or 12AA or from assessment year 2021-22 and on words also u/s 12AB
- From an individual by a trust created or established solely for the benefit of relative of individual.
In the case of HUF, definition of relative include all the members of HUF. Accordingly, any member has given gift to their HUF, it will be exempt, but from the amount received as gift HUF will earn any income will be considered as income of that member as per section 64(2) of act. On this fact, in the year 2011 Rajkot Appellate Tribunal has given the judgment in favored of assesse (Vinitkumar Raghvajibhai Bhalodia Vs. ITO (140 TTJ 58) Rajkot.
The limit of Rs. 50,000 in a year is to be considered by recipient, it may be from one person or more than one person.
Tax planning by Gift:
An income of Mr. A during the year is Rs. 10,00,000 on which he is paying tax of Rs. 1,12,500 for assessment year 2023-24. His income include Rs. 4,00,000 interest on Deposit @ 8% on Deposit of Rs. 50,00,000 and 6,00,000 other income.
If Mr.A will give gift of Rs. 25,00,000 to his son and daughter each. His income of Deposit will be zero and he has to pay tax on other income of Rs.6,00,000 and pay tax of Rs. 32,500. His son and daughter will get interest income of Rs. 2,00,000 each, which is below taxable income. Suppose if his son or daughter have any other income, they may take benefit of Section 80.
Please remember that while giving gift to your children, they must be a major one, otherwise their income will be clubbed with father.
Conclusion: Understanding the intricacies of gift taxation is crucial for both givers and receivers. The Rs. 50,000 limit applies per recipient, emphasizing the need for careful tax planning. Exemptions exist for gifts between relatives, marriages, inheritances, and various specific situations.
Tax planning through strategic gifting can optimize one’s overall tax liability. For instance, gifting assets to family members can potentially reduce tax burdens by distributing income among beneficiaries. However, it’s imperative to consider the recipient’s age to avoid income clubbing.
Stay informed and make well-informed decisions to navigate the nuances of Gift Tax under the Income Tax Act, ensuring compliance while optimizing tax outcomes.
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