In this article, we look at income tax applicable on gift in detail.
Income tax was not applicable on all gift received by a person until the financial year 2003-04. In 2004, changes were made to the Income Tax Act. Currently, any amount received by a person or HUF over Rs.50000/- in a year from any unrelated person, in cash or in kind, will be included as income.
Income tax is not applicable on gifts received from relative (Meaning of ‘relative’ is provided below). Friends do not fall under the definition of relative as per Income Tax Act. Thus, gift received from friends will be charged to tax if it exceeds the threshold.
Gifts received from relatives is not taxable and there is no limit on the amount of money that can be received as gift from relative that is not chargeable to income.
However, money received without consideration by an individual or HUF from any other persons other than a relative is chargeable to tax if the aggregate value of the money received during a year exceeds Rs.50000/- .
Hence, if the total value of gifts received by a person exceeds Rs.50000/- in a year and he/she did not receive the money as a gift for wedding, then the entire amount received by the taxpayer will be taxed.
Example:-If a taxpayer received a gift of Rs.45000/- during his/her birthday from a friend, the entire amount of Rs.45000/- will not be taxable under income tax.
On the other hand, if a taxpayer receives a gift of Rs.55000/- during his/her birthday from a friend, the entire amount of Rs.55000/- will become taxable under income tax, as it exceeds the threshold.
Gift from relatives are not taxable under the Income Tax Act. As per the Income Tax Act, the following lists of persons are defined as a relative of an individual. Hence, only money received from the following persons will be exempt from income tax for an individual taxpayer.
Money and gifts received by an individual taxpayer on the occasion of his/her marriage are exempt from income tax.
Money received by way of Will or by way of inheritance is exempt from income tax. Hence, no income tax will be payable on any movable or immovable assets inherited, consequent to the demise of a relative.
Similar to inheritance being not taxable, money received in contemplation of death of an individual or karta or member of a Hindu undivided family is also exempt from Income Tax. According to the Dictionary, the word contemplation means “the state of being considered or planned”.
According to the Income Tax Act, any money received from a local authority or fund, foundation, university, other educational institution, hospital or other medical institution or any trust having 12A registration is exempt from income tax.
Under this section, money received by a meritorious student from a college or University or a patient under medical care can be exempt from income tax.