Understand Implications of Income Tax on Gifts from Relatives

Introduction

• Without the exchange of gifts, Indian festivities are incomplete. Friends and family exchange a variety of presents, including cash, gold, diamonds, property, and so on. Gifts you receive may not always be tax-free because the government levies income tax on gifts from relatives.  
• If the value of the gift exceeds Rs 50,000, you must pay income tax. Gifts up to Rs 50,000 are fully tax-free, but after that threshold is exceeded, the entire value of gifts becomes taxable.
• According to the requirements of the Income Tax Act, gifts received constitute taxable income. However, until the fiscal year 2003 – 2004, income tax on gifts from relatives was not levied.
• The Income Tax Act was amended in 2004 to ensure that the income tax on gifts from relatives is not exempted.
• Currently, any sum received in cash or on credit by an individual or HUF from an unrelated person in a fiscal year will be recorded as income. This article examines the application of income tax on gifts from relatives.

Income Tax on gifts from relatives

Income tax on gifts from relatives does not apply to presents from family. According to the Income Tax Act, friends do not qualify as relatives. Thus, gifts from friends will be taxed if they surpass the threshold limit of fifty thousand rupees.

Gifts are Subject to Taxation

• Income tax on gifts from relatives is not taxable, and there is no limit to the amount of money that can be received as a taxable gift from a relative in his/her marriage. 
• Money received without consideration by an individual or HUF from anybody other than a relative, on the other hand, is taxable if the total amount of the money received throughout the year exceeds Rs. 50,000.
• Furthermore, presents received on the occasion of marriage are not subject to income tax on gifts from relatives. However, gifts received on an individual’s birthday, anniversary, or other special events will be taxed.
• Gifts received by will/by Inheritance, as well as gifts received in anticipation of the donor’s death, are likewise not subject to income tax on gifts from relatives.
• As a result, if a person’s total value of gifts received in a year exceeds Rs. 50,000 and the assessee did not get the money as a present for the person’s wedding, the full amount received by the taxpayer would be taxed.
• Example- If a taxpayer receives a present of Rs 45,000 from his/her cousin on his or her birthday, the full sum of Rs.45,000 is not taxable under income tax on gifts from relatives.
• If, on the other hand, a taxpayer gets a present of Rs 55,000 from his cousin on his or her birthday, the full sum of Rs 55,000 becomes taxable under income tax on gifts from relatives since it exceeds the threshold.

Gifts from Relatives

Under the Income Tax Act, gifts from family are not taxed. The following individuals are defined as a relative of an individual under the Income Tax Act. As a result, only money received from the individuals listed below is free from income tax for an individual taxpayer.

• The individual’s spouse
• The individual’s brother or sister.
• The individual’s spouse’s brother or sister.
• Individual’s brother or sister from either of the individual’s parents.
• Any descendant or ancestor of the individual.
• Any descendant or ancestor of the individual’s spouse.

Income tax on gifts from relatives and Money received by an individual taxpayer on the occasion of his or her marriage is excluded from income tax.

Gifts received under a Will, via Inheritance, or in anticipation of the payer’s death.

• Any sum received under a will, through Inheritance, or in anticipation of the payer’s death is totally exempt in the hands of the person receiving the gift.
• There is no maximum restriction in this scenario, and the entire donation received is not subject to income tax on gifts from relatives. One must take legal advice from a lawyer in this situation.
  

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Money Received in Death Contemplation

Similarly, Inheritance, money received in anticipation of the death of a person, Karta, or member of an undivided Hindu family, is also not subject to income tax on gifts from relatives.

How will you tax immovable property that was given to you as a gift?

• If you get a gift deed (movable or immovable property) for minimal value, the income tax on gifts from relatives is calculated by the shortfall between the consideration and the stamp duty value.
• For example, if you get a gift deed of an apartment worth Rs 50 lakhs (according to stamp duty circular rates) and pay just Rs 30 lakh, the additional Rs 20 lakh is deemed as income, and income tax on gifts from relatives is levied.
• It is important to note that if the difference between the real value and the stamp duty value is less than Rs 50,000, the transfer is not deemed a taxable gift.
• The stamp duty value would be considered for immovable properties, while the fair market value would be assessed for moveable properties for the calculation of income tax on gifts from relatives.

The term Property has also been defined, and it means:

• Immovable property includes land, buildings, or both.
• Securities and shares
• Jewelry
• Collections of Archaeology
• Drawings
• Paintings
• Sculptures
• any other piece of art

Income tax on gifts from relatives would be charged exclusively on the aforementioned properties. As a result, if any property is not stated above, no tax will be imposed on those properties received as a gift.

Cars, laptop computers, and mobile phones are examples of such properties that are exempt from income tax on gifts from relatives. However, it is advisable to take legal advice from professionals for a better understanding of taxation.

Conclusion

Gifts you receive may not always be tax-free because the government levies income tax on gifts from relatives. If a person gets presents (whether in cash or in-kind) from anyone (other than relatives on the occasion of marriage), the person receiving the gifts must pay gift tax.

Such income would be taxed in the year of receipt and would be classified as income from other sources. After adding this to the revenue from other sources, the total gross income is determined, and tax is charged on the gross total income based on the income tax slab rates.