February 14 , 2013
Getting a huge gift from someone can increase your tax outgo by raising your income tax slab. Although the Gift Tax Act ceased to hold in India from 1998, the government found its way to tax big gifts through amendments in the Income Tax Act.
Accordingly, any gift of value over Rs 50,000 attracts income tax at a rate applicable for the receiver's tax slab. In fact the income tax rules for gifts were tightened after realizing that former rules left loopholes for black money to change hands and escape tax when presented as gifts.
Current Income Tax rules on gift income
Section 56(2) of the Income Tax Act deals with income on gifts. It actually relates to income from 'other' sources. Other sources refer to those other than salary, business profit, capital gains on investments and house income. So other income in section 56(2) refers to interest income on FDs, bonds, etc, casual income from winning lotteries, crossword, puzzles, gambling, horse race and gifts of value over Rs 50,000.
The onus of paying income tax is, of course, on the one who receives gift income. Tax rate applicable on gift income is as per the tax slab the person concerned falls under. Hence effectively any income above the stipulated limit that you receive from someone becomes part of your gross total income and is taxable.
What is 'gift' in gift tax?
Income Tax law does not use the word 'gift' in connection with tax on gifts. Rather it states that any amount of money or property worth over Rs 50,000 given to a person without consideration or for lesser consideration will attract income tax. In income tax jargon, to receive without consideration or for lesser consideration means getting something of value in return for nothing being paid or for paying lesser value.
Thus a gift of cash or gift of moveable or immovable property attracts tax. We shall elaborate on these.
Tax on cash gifts
Any amount of cash above Rs 50,000 received without consideration attracts income tax.
Tax on gift of immovable property
When you get land or building worth Rs 50,000 for which you either pay nothing or pay lesser than its value income tax is to be paid on it. Tax is to be paid on the full value of property or on that value you got free of cost. Here stamp duty value of property is considered.
Tax on other gifts
If you receive jewelry, drawings, paintings, sculptures, other art work or someone transfers FDs, shares or other securities to you, you are liable to pay income tax on the value of the gift or on that part of its value which you got free, without payment. These are collectively termed movable property in Income Tax laws. On such gifts, market value will be considered as their value.
Exemptions in gift tax
It would be very unfair if a person has to pay income tax on cash his sister gifts him or on property he inherits from his father. Indeed Income Tax laws have provisions for exempting gifts from certain people or received on certain occasions from income tax.
Any gift you receive from a relative, or in connection to your marriage or what you get by a will or inheritance is free from income tax. To know who all can give you tax free gifts read definition of relative.
Also if any person makes a gift to you in anticipation that he/she will not live much longer this gift income is also exempt from gift tax under Income Tax law.
However the law does not leave loopholes here. If you think you can invest/deposit in the name of a relative and get away without paying (or paying lesser) tax, wait.
Gift received by child or spouse
If your minor child receives a gift this will not be exempted unless it is in one of the ways mentioned above. It will be added to the income of the parent having higher income. Gift income of your spouse will also be treated as part of yours and will be taxable, unless you or a relative made the gift.
Future income from gift is taxable
Future incomes from gifts, is taxable in the hands of the donee. In case your spouse or minor child gets a gift, any income from it will be clubbed with yours. For example if it is an FD or real estate property the interest or rental income from them, will be clubbed with your income. This is true about any gift you make to a minor child, spouse or son's wife.