Gifts: Exemptions

Gifts: Exemptions and computation

Receiving Gift indeed brings a cheerful smile on the face of the receiver, but if receiver gets to know that he has to pay tax thereon, the smiling face may turn sad.

Although Gift Tax Act has been abolished, however there are certain provisions in the Income Tax Act, which make the gift taxable in the hands of the recipient.

Today we shall share with you certain circumstances when the gift so received is not taxable in the hands of the recipient.

If a person receives Gifts (either in cash or in kind) from any person, gift tax is to be paid by recipient of gift. Such income would be taxable in the year in which the gift is being received and taxable under head income from other sources. After adding the value of Gift so received to income under head other sources, the gross total income would be computed and the tax would be levied on the gross total income as per the income tax slab rates.

A – Exemption from levy of Income Tax on Gift

Income Tax on Gift received by an individual or HUF is governed by provisions of Section 56(ii) of the Income Tax Act. As per the provisions of this Section, Gift Tax will not be levied under the following 7 circumstances:-

1. Gifts received from Relatives

Gift received from Specified Relatives is fully exempted and no income tax would be levied on such Gifts. The persons who constitutes relatives for this purpose are defined as under:

1.Spouse of the Individual

2.Brother or Sister of the Individual

3.Brother or Sister of the spouse of the Individual

4.Brother or Sister of either of the parents of the Individual

5.Any Linear ascendant or descendent of the Individual

6.Any Linear ascendant or descendent of the spouse of the Individual

7.Spouse of the person mentioned above

There is no maximum limit on the value of gifts received to be exempted from Gift Tax. All gifts received from relatives (irrespective of value) are exempted from the levy of Gift Tax.

2. If the aggregate value of gifts received is less than Rs. 50,000

Income tax Act has defined Rs. 50,000 as the exemption limit. If the total value of gifts (whether in cash or in kind) received from a persons (except relatives as specified above) in any financial year does not exceed Rs. 50,000/-, then such gift are not liable to Gift Tax. However, if the value of gifts received exceeds Rs. 50,000/-. Then the entire gift so received is taxable as Income from other sources.

3. On the occasion of Marriage of the Individual

Gifts received by an individual on his own marriage are fully exempted from Gift Tax. It has also been clarified that the gifts received by a person on his own marriage are exempted and not on the marriage of their son/daughter/brother/sister.

4. Gift Tax on Property received

Prior to 2009, gifts received in kind were not taxable but now, they are taxable now.

Gift Tax on Assets received in kind would be levied in the following manner:-

◦In case the property is received without any consideration, the stamp duty value/fair market value of the property would be taxable (provided the stamp duty value exceeds Rs. 50,000);

◦In case part consideration is being paid by the person receiving the gift, and the difference between the part payment made and the stamp duty value/fair market value is more than Rs. 50,000/-, such difference would be taxable.

In case of Immovable Properties, the stamp duty value would be considered and in case of Movable Properties, the fair market value would be considered.

The meaning of property has also been defined and Property means:-

◦Immovable Property being land or Building or both

◦Shares and Securities

◦Jewellery

◦Archaeological Collections

◦Drawings

◦Paintings

◦Sculptures

◦Any other work of Art

Tax on Property received as Gift would only be levied in case of the above mentioned properties. Thus, in case any property is not listed above, tax on those properties received as gift would not be levied. Examples of such properties on which gift tax would not be levied are Cars, Laptops, and Mobiles etc.

5. Gifts received under a Will or by way of Inheritance or in contemplation of death of the payer

Any amount received under a will or by way of inheritance or in contemplation of death of the payer is fully exempted in the hands of the person receiving the gift. There is no maximum limit in this case and the whole gift received is considered as tax free.

6. Gifts received from any Local Authority as defined in Section 10(20) is also exempt.

7. Gifts received from any fund or foundation or university or other education institution or hospital or other medical institution or any other trust or institution referred to in section 10(23C) or Gifts received from any fund or Institution registered under Section 12AA

B – Capital Gains on Assets received/transferred as Gifts

In the hands of the person giving the gift

If a person gives gifts to another, then such gift would not be regarded as transfer and therefore no capital gains would arise in the hands of the transferor i.e. the person who is giving the gift. And therefore, at the time of giving the gift, no tax would be required to be paid by the person giving the gift.

In the hands of the person receiving the gift

◦The Cost of acquisition in the hands of the person receiving the gift would be the same as the cost of acquisition in the hands of the person who gave the gift.

◦For the computation of period of holding, the period of holding in the hands of the person giving the gift would also be included.