Well, every one of us loves to receive gifts. Gifts are one of the ways for showing your love and affection towards your near and dear ones.
Usually, people present birthday gifts, marriage gifts, and anniversary gifts to their loved ones.
However, sometimes we receive bulk gifts, and that is when the issue of gift taxability arises.
So, you ought to have a thorough understanding of Gift Tax Rules (as applicable in India).
Now, it’s time to shed confusion regarding gift taxability.
The gift has been defined in the Income Tax Act 1961 as an asset which is received without giving the donor any consideration.
Gifts can be in the form of a cheque, cash receipts, or drafts.
It can be a movable property such as jewelry, securities, antiques, paintings, gold bars, sculpture or vehicle.
The gift can also take the form of immovable property such as building, house, flat, or land.
Gift Tax Rules
Let us go over the gift tax rules to ascertain when you have to pay gift tax and under what circumstances it is exempt.
Gifts up to Rs.50000 a year: The recipient is not liable to pay any tax in the case when the value of gifts received is less than Rs.50000 a year irrespective of who gifts the money. In case the value of gifts received exceeds Rs. 50000 a year then it will be fully added as taxable income of the recipient.
So, if the value of gifts received is Rs.49000, then there is no tax to be paid on the gift value.
However, if the value of gifts received is Rs.60000 then total Rs.60000 (and not just Rs10000 which is over the Rs.50000 mark) will be treated as taxable income.
Gifts from relatives: Although the general rule of Rs.50000 is applicable for any donor in general, such as a friend, things are different when the donor is a blood relative. As per Income Tax Act, gifts from relatives are fully exempt from taxation.
Any of the below-mentioned persons qualifies as a relative according to Income Tax Act:
(a) Individual’s Spouse
(b) Individual’s brother or sister
(c) Brother or sister of the Individual’s spouse
(d) Brother or sister of either of the parents of the individual
(e) Any of the lineal ascendant or descendant of the individual
(f) Any lineal ascendant or descendant of spouse of the individuals
(g) Spouse of the persons that are listed in (b) to (f)
Let us get to know how this works out.
Suppose, an individual receives Rs.55000 as a gift from his friend then the full amount is Taxable.
However, if any of the above relatives gifts you Rs.55000, then the entire amount is exempt from taxation.
According to the gift tax rules in India, any gift (including monetary form) received from any person at the time of marriage of the individual does not attract any income tax. So, wedding gift received either from relatives or non-relatives is not taxable in your hands.
Even if you get Rs.5 Crore as a wedding gift on your wedding, it is not liable for taxation. In fact, there is no monetary limit attached with this exemption. Suppose, you receive a gift worth Rs.25 lakh on your marriage, it will be taken as a wedding gift and is never taxed. However, taxes are applicable if gifts are given at the time of engagement or marriage anniversary.
Gift Tax on Immovable properties
In gifting of immovable property, valuation aspect is involved.
Scenario 1: When the property is gifted without any consideration >> stamp duty value will be taken if it exceeds Rs.50000.
Scenario 2: When the property is gifted for a consideration >> the actual value of the property will be taken.
Gift Tax on Movable Property
- If the value of movable property received as a gift without consideration exceeds 50000 INR, then the same will get taxed in the hands of the recipient.
- When the gift of movable property is given with consideration, and the value of the movable property minus consideration exceeds 50000 INR, then the taxable amount is the value of the movable property reduced by consideration.
No Gift Tax is applicable when the amount received is through WILL or inheritance.
If any sum of money or property is received by way of WILL or inheritance, it is totally exempt from Gift Tax. So, when you receive a real estate worth Rs.75,00,000 and other things worth Rs.25,00,000 by way of inheritance, then you do not have to pay tax on that amount received.
Special Gifts and Income Tax Exemption
- Gift received in contemplation of death of the donor.
- Gift received from any local authority.
- Gift received from any foundation, educational institution, university, hospital, or trust as referred in Section 10 (23C).
- Gift received from any trust or institution registered as a public charitable trust or institution as listed in Section 12AA.
Gifts and Clubbing of Income
The income generated by way of receiving gifted money is not exempt from tax. The Income Tax Department has segregated the recipients based on the dependency on the donor. It is known as Clubbing of Income.
- Income generated when money is gifted to wife/ minor children – When individual gifts money to his spouse or minor children, then any income generated by the recipient on it is clubbed with the income of the donor.
- Income generated when money is gifted to another relative – If the recipient is not a spouse or minor children, the income generated is taxable in the hands of the recipient.
Let’s take an example to show you how clubbing of income works out.
Suppose you gifted Rs.500000 to your wife, and she put the money in a fixed deposit at 10% p.a. interest. Now, the income earned which in this case is the interest on the fixed deposit, i.e., Rs.50000 will be added to your income, and you have to pay tax based on your tax slab.
However, if your wife chooses to reinvest the interest earned (Rs. 50000) and earns Rs.5000 (10% of 50000) as interest, then the income on reinvestment will be taken as her own income.
Now, if the recipient is your mother, then the interest earned on the fixed deposit of Rs.500000 will be treated as her income and will be taxed in her hands.
How to Document Gift Transactions
A gift deed is a deed which is executed and delivered wherein the donor transfers the title to the receiver without getting any payment or consideration. It is documented transferring the legal title of the property to the donor in which consideration is not mandatory.
Gifts which are made through cash or cheque do not require a gift deed. You just need to have a plain typed note on paper without any stamp or registration. You simply have to mention the names of persons, their relation, and that the gift has been given out of affection.
However, gifts of movable property need to be made on stamp paper and stamped by the notary or court. Registration of gift deed is not mandatory in this scenario. Gift of immovable property has to be registered and signed by the donor.
How to Save Gift Tax?
- For nullifying clubbing provisions, you can invest in tax-exempt avenues. For example, the spouse can invest the gifted money in ELSS Mutual Funds where the lock-in period is 3 years. Alternatively, the gifted money can be invested in listed company shares with a lock-in period of one year. Here, the income arising from the investment will not affect the donor’s taxable income, as interest earned is totally tax-free.
- Clubbing provisions are not applicable when you give loans or simple gift money to either your own parents or in-laws. The money is taxable in the hands of the recipient.
- You can gift money or assets to major children who are either students or earning with the non-taxable slab. It does not attract any gift tax or clubbing provisions of Income Tax in India. So, it turns out a great way of investing surplus income without facing the heat of high taxation.
Gift Tax FAQs
Q. How much money can be given tax-free as a gift?
A. According to Section 56(2) of the Income Tax Act 1961, the gifts received by any individual or HUF in excess of Rs.50000 in a year would be taxable.
Q. What is the gift tax rate?
A. According to the Indian Income Tax Act, any sum of money, movable or immovable property received without any consideration or payment is taxable under ‘Income from other sources.’ However, there are certain exemptions which we have already described above.
Q. How much money can your parents give you as a gift?
A. Money received from parents (as a gift) is totally tax-free in the hands of the recipient. You do not have to pay any tax on the amount received by your parents.
Q. Can husband gift money to wife?
A. Yes. However, the amount of money that is gifted will not be reduced from the total taxable income and the husband has to pay tax on the total income (according to the tax slab applicable to him) and the gifted money to wife will not be reduced from his total taxable income.
Q. Gift tax slab in India?
A. If the aggregate value of gifted money is less than or equal to Rs.50000 a year, then no tax is charged on the recipient (individual/HUF). However, if the value exceeds Rs.50000, then the whole amount is taxable in the hands of the recipient. The amount is added to ‘income from other sources’ and taxed depending on the tax slab applicable to the person.