You probably received plenty of gifts on Deepawali and are looking forward to more at Christmas. The taxability of gifts is perhaps the last thing you want to think about when exchanging presents. Let’s take a quick look at the tax implications for gifts under the Income tax Act, 1961 (henceforth, ‘the Act’).
Earlier, gifts were taxable under Gift Tax Act, 1958. However, it was abolished in 1998. In order to again bring gifts under the net of taxation, provisions were introduced in the Act in 2004.
The Act provides for taxation of gifts received in the form of cash, cheque, draft or specified assets by an individual or a Hindu Undivided Family. Gifts received are taxable other than certain exceptions, as mentioned later in this article.
Gifts received in the form of cash, cheque or draft are taxable if their total amount exceeds R50,000 in a year. If the total exceeds R50,000, the whole amount is chargeable to tax. So, if the total amount is R55,000, then the entire sum is chargeable to tax.
The provisions also cover gifting of any immovable and specified movable properties. Accordingly, gifting of immovable property, such as land and buildings, and movable property, such as jewellery, drawings, paintings, shares and securities, archaeological collections, sculpture, bullion and works of art, is chargeable to tax in the hands of the recipient.
As with any provision, there are some exceptions here. Any sum or property received from specified relatives, a local authority or specified trusts or institutions such as a university or hospital, is not chargeable to tax. Any sum or property received on the occasion of marriage, under a will or by way of inheritance and in contemplation of death of the payer or donor, is also exempt from tax.
The term ‘relative’ for an individual is defined to include spouse, lineal ascendant or descendant of that individual or spouse such as parents and grandparents, children and grandchildren as well as brother or sister of this individual or spouse, and a brother or sister of either of the parents of the individual or spouse. According to the exception, gifts received from a relative are totally exempt from tax.
Considering not all relatives are covered in the exception, it is important to consider the nature of relation before claiming benefit under exception. For instance, a gift received by a nephew from his uncle is not liable to be taxed according to the provisions of the Act, but a gift received by an uncle from his nephew is not covered under the exceptions. In the case of a HUF, a relative means any member of the HUF. A gift received by a HUF from its members is fully exempt from tax.
Gifts received by a partnership firm or a privately held company in the form of shares of a privately held company have also been brought under the ambit of taxation. It is taxable if the aggregate fair market value of shares exceeds R50,000. This could be relevant in case of your partnership firms or private companies. An individual receiving taxable gifts is required to offer these gifts to tax and disclose them in the income tax return under the head ‘income from other sources’.
The writer is executive director, Tax & Regulatory Services, PwC India